Mr. LEVINE. Potatoes on hand, sir

Senator MUSKIE. Do you know what that is, by the way? Do you know the volume of potatoes on hand?

Mr. LEVINE. On the last day of trading, sir?

Senator MUSKIE. Then and now.

Mr. LEVINE. The exchange undertook a careful analysis of the cash market in Maine and as a matter of fact, Mr. Chipman Bull, who is the executive secretary of the Maine Potato Commission, himself was quoted as saying that there was sufficient supplies of potatoes available for shorts to buy to fulfill their delivery obligations, which is consistent with the exchange's own analysis.

Senator MUSKIE. Why did they not buy?

Mr. LEVINE. Yes, sir, why did they not buy?

Senator MUSKIE. And the fact that they did not buy, did not that inevitably have the effect of keeping the price down?

Mr. LEVINE. It depends on what period of time we are talking about, Senator. The lack of purchase between the time they obligated themselves to deliver, which was May 7 and May 25, would not have had an impact on the price prior to May 7 when they had an option not to deliver and could have gotten out of the market by buying back their futures contracts.

Senator MUSKIE. Was the situation at that point cumulative such that actually the shorts had concentrated in three dominant hands? Was not that situation pretty visible before May 7, and was not the question of what was motivating those three dominant interests, now bound to be taken into account by anybody who had any potatoes?

Mr. LEVINE. Senator, the short position was concentrated in five, not three, hands. And of the five

Senator MUSKIE. Can you identify them?

Mr. LEVINE. Of the five clearing members, Senator, who were obliged to deliver, two, in fact, fulfilled their delivery obligations, and the question that you have raised is well put: In the case of the other three clearing members, why did they not fulfill their own. obligations? And that, Senator, is very much the subject of exchange hearings at the moment.

I cannot answer you because those hearings are still pending; but I can assure you that nobody wants to know the answer to that question more than İ.

Senator MUSKIE. Could I ask you one question?

Would you be receptive to holding a hearing in Aroostook?

Mr. LEVINE. I am sorry, Senator?

Senator MUSKIE. Would you be receptive to holding such a hearing in Aroostook County, the northern Maine county? Mr. LEVINE. As to what, sir?

Senator MUSKIE. As to these questions.

Mr. LEVINE. At the moment, Senator, the exchange, in dealing with the clearing members and not the customers, is holding hearings in New York so that those who must sit in judgment or in a position to collect the information are not unnecessarily inconvenienced. These hearings have been going on for days. They are literally as time-consuming as any of those that you yourself attend. Senator MUSKIE. I am sure they are.

Mr. LEVINE. The exchange has had representatives in the county talking with the representatives of industry, determining their at titudes, how they feel, getting their reactions to what is going on; so that the exchange is not without input from the county.

Senator MUSKIE. There is nothing like being there to get the feel of that county.

Mr. LEVINE. That is why we have sent people to the country, sir. Senator MUSKIE. Well, the people I talked to last night are pretty prominent members of the industry and they did not mention the fact that this kind of activity is going on. It is a big county geographically, as you know. It is as large as the State of Massachusetts. How many people have you sent up there?

Mr. LEVINE. In the past 2 weeks there have been two visits that I know of. The exchange's vice president for research and education, Dr. Allen Abrahams, was in the county as late as last Thursday. Senator MUSKIE. Well, I have been in the county, as you know, as a Senator, and left only to learn later that nobody knew that he was there. I mean there is nothing like a public hearing to get attention. Mr. LEVINE. Well, he was on the television.

Senator MUSKIE. Well, a lot of people do not watch it.

In any event, what the people want is a chance to speak up and I do not know who he talked to. I raise the question now without trying to nail it down. I simply want to send it up as a trial balloon because they are upset; and when those people are upset they like to have a chance to talk to the people who are upsetting them, as I have learned over 20 years; and I think Mr. Bagley would confirm that. Mr. LEVINE. I am a New Englander myself, Senator.

Senator MUSKIE. Senator Huddleston, I interrupted a question of yours.

Senator HUDDLESTON. I just wanted to interject a question.

Mr. Levine, regarding the supply of potatoes, in your opinion what happened to the markets between the time that you received assurances that there was a sufficient supply for all of the short sellers to fulfill their obligations and the time that the exchange determined it was impossible to meet those short obligations because the supply was not sufficient.

Mr. LEVINE. That is certainly an appropriate question, Mr. Chairman, the answer to which I cannot give you. I really do not know. I know that in fact there was an analysis done by the exchange prior to May 7 indicating the availability of a sufficient supply of the shorts to meet their delivery obligations.

I also know, based on personal effort, and telephone calls to acknowledged sources of good market understanding and potato availability in Maine, that I could not buy quantities of potatoes sufficient to meet the number in default, sir.

Senator HUDDLESTON. What was the price differential between those two periods?

Mr. LEVINE. The cash market price, sir?

Senator HUDDLESTON. Yes, sir.

Mr. LEVINE. I think the cash market price is a matter of interpretation, Mr. Chairman.

The cash market price as quoted by the Government Price Reporting Service, the USDA Price Reporting Service in Maine, as Senator

Muskie probably knows, is an indication of typical shipments that take place in the cash market on a daily basis.

These typical shipments are not characterized as to quality or variety and it is generally acknowledged, by the CEA and now by the CFTC, that you are talking of a difference between the cash market price as quoted and the cash market price for deliverable potatoes under the New York Mercantile Futures contracts.

There is some additional quality requirement and difficulty that is perceived in the loading of cars by the Maine farmers who demand a premium for those potatoes.

Senator HUDDLESTON. Well, was there any evidence, or do you have any knowledge of any producer or selling agent that might have withheld his potatoes from the market during that period of time!

Mr. LEVINE. These areas of inquiry, Mr. Chairman, are very much being undertaken by the exchange and comment in direct answer to that question on my part would be, I think, premature at the

moment.

But be assured, please, that that possibility has crossed our minds and we are pursuing this and are assured that the Commission is also pursuing this line of inquiry.

Senator HUDDLESTON. Now, just for the record, let us get the specific time frame we are talking about.

On May 7, there were indications that there was a sufficient supply of potatoes to meet all of the short obligations at that time. Now. what date was it that you were not able to meet the requirements of the contract and the obligations of the exchange in the case of default because the potatoes were not available?

Mr. LEVINE. My report to the board, Mr. Chairman, is dated the 27th of May, 2 days after the default.

The difference between May 25 and May 27, represents a period of time in which the exchange diligently tried to, and at this point wishes very much it had been able to purchase potatoes in the quantity equal to that in default.

Senator HUDDLESTON. And you contacted all the normal sources of supply and found that you could not make a purchase?

Mr. LEVINE. Indeed we did, sir.

Senator HUDDLESTON. Two of the defaulting or potentially defaulting shorts did make purchases.

Is it possible that they could have exhausted the supply?

Mr. LEVINE. Your question, Mr. Chairman, I believe refers to the fact of the five clearing members obligated to make delivery, two in fact did, and three in fact did not.

Senator HUDDLESTON. Thank you.

Mr. LEVINE. Delivery can be accomplished under the contract in one of two ways:

Through the normal delivery of Maine potatoes and through the delivery of potatoes either grown or not grown in Maine and/or delivered in some different form. By "form," I mean payment terms or means of transportation or types of potatoes other than what the contract requirements are for the delivery of potatoes grown inside of the State of Maine, provided the buyer is willing to receive them. These deliveries are called exchanges of futures for product, in which case the delivery of a product other than that required by contract

specification is substituted for the obligation to deliver strictly pursuant to contract specifications.

A number of deliveries were made in this manner through the delivery of Western potatoes. A number of deliveries of Maine potatoes in truck, bulk, in some form acceptable to the buyer, but not specified in the contract, were also made.

Two of the five firms obligated to deliver, fulfilled their delivery obligations in one of these ways.

It should be said also that part of the delivery obligations of the other three firms were fulfilled in this manner as well.

I cannot comment on whether those efforts to fulfill delivery obligations exhausted the supply. I am led to believe, Mr. Chairman, that had a willingness been demonstrated on the part of those obliged to deliver, to pay whatever it took to purchase potatoes that would otherwise be planted as seed, that as one source of potatoes in Maine described to me, farmers would sell their seed potatoes and, rather than plant, would go fishing because they would already have built in a profit they expected to get on the next year's crop.

Senator MUSKIE. What price was offered by the exchange in an effort to get potatoes?

Mr. LEVINE. The exchange offered to pay any price, Senator, to buy potatoes and was totally unsuccessful in obtaining any, but indications for a very few number of cars.

Senator MUSKIE. How was that offer communicated?

Mr. LEVINE. By phone through me to individuals in the county. Senator MUSKIE. And those times you just gave them a blank check?

Mr. LEVINE. Senator, the potatoes were not there to buy. I asked specifically.

Senator MUSKIE. What has happened to them?

Mr. LEVINE. Pardon me?

Sentor MUSKIE. What has happened to them if they were there on the 7th of May?

Mr. LEVINE. That was the chairman's question, which I simply have no answer to. I really do not know.

Senator HUDDLESTON. The information on the 7th of May could have been faulty.

Senator MUSKIE. That is the fastest move of Maine potatoes I have ever heard of.

Mr. LEVINE. I have conjectured that there could have been an unwillingness to sell the potatoes to the exchange. We are pursuing that, too.

Senator MUSKIE. At any price?

Mr. LEVINE. Yes, sir.

Senator MUSKIE. Now, you have aroused the curiosity of all of us. Senator HUDDLESTON. Mr. Levine, one final question.

Are you confident, in what Mr. Bagley described as "the potato fiasco," that the exchange has done all that it could do and all that it should have done within the framework of its rules and regulations to prevent the loss to any individual through unlawful trading practices?

Mr. LEVINE. Mr. Chairman, that has to be the most important question of all, and the first that I, personally, and the exchange have to

answer.

Of course, that is the subject of the Commission's investigation of the matter.

I have done a great deal of soul searching; our board has done a great deal of soul searching; the chairman of the exchange, likewise. Of course, that question has to be answered without the benefit of 20-20 hindsight. It is always easy to go back in theory, now that you know something has happened, and theoretically take action that might possibly have avoided it.

I think the answer to your question, Mr. Chairman, is that the exchange expects to be able to demonstrate to the Commission a reasonable market surveillance prior to the end of trading on May 7, a responsible effort after May 7 to avoid the kind of conditions with which we are now faced, a responsible kind of effort subsequent to May 25 to deal with the conditions that arose as a result of the default and a responsible view of the future with regard to an amendment of its futures contract in potatoes to create the kinds of conditions which will act as a further deterrent to another default.

Senator HUDDLESTON. Senator Dole, do you have any further questions?

Senator DOLE. No.

Senator HUDDLESTON. Senator Muskie?
Senator MUSKIE. Yes.

I am bothered by this price.

The people I talked to last night and I was not aware that you were going to offer an open price-there was certainly nothing said. to me to suggest that they were aware of it, because their concern was directed to the price that they understood was being set up under the procedures available to the exchange to set the price.

I mean how does that fit with what you have just said about May 27th.

Then you said you were offering any price.

Are you offering something different from that now or what price have you set and what is the relevance of it to this whole situation? I am puzzled, that is all.

You have a committee now that advises you?

Mr. LEVINE, That is right, sir.

The exchange has a rule which provides for certain procedures to be followed in the event of unlikely default.

The first procedure to be followed is for the president to purchase potatoes in a quantity sufficient to equal those in default and deliver them to the buyer. That was impossible. We tried and failed. Senator MUSKIE. What then?

Mr. LEVINE. That rule then becomes inoperable.

Senator MUSKIE. How then do you compensate a buyer for the potatoes that he does not receive?

Mr. LEVINE. As a result, Senator, the exchange amended its rule under its emergency provisions, to provide for a procedure that would compensate for the inoperability of that first portion of its rule, and that procedure was the appointment of a special committee to determine a fair market value for potatoes that are undelivered. The diference is this: the exchange undertook to purchase potatoes and determined that potatoes were available for purchase. The exchange made an honest effort to purchase potatoes and indeed we did, and made no effort to restrict the price we would pay and nevertheless failed to