Before CLARK, Chief Judge, and MEDINA and WATERMAN, Circuit Judges.
This is an appeal from an order of the Secretary of Agriculture denying trading privileges on all contract markets to petitioner, Corn Products Refining Company, for a period of one day because of alleged violation of the provisions of § 4a of the Commodity Exchange Act, 7 U.S.C.A. § 6a, and a regulation promulgated thereunder, 17 CFR 150.1. The Secretary of Agriculture, acting through the Judicial Officer, found that petitioner held a net long position*fn1 in corn futures contracts in excess of the 2,000,000 bushel trading limit established pursuant to the Commodity Exchange Act.
The issue presented here is whether certain of petitioner's transactions come within the coverage of § 4a, and, if so, whether they qualify under the exemption provided in the section for "bona fide hedging transactions." This Court has jurisdiction under § 6(b) of the Commodity Exchange Act, 7 U.S.C.A.§ 9, and § 10(a) and (b) of the Administrative Procedure Act, 5 U.S.C.A. § 1009(a) and (b).
The complaint below alleged, inter alia, that petitioner violated the provisions of the Act and the applicable regulation in that, as the result of transactions entered into on the Chicago Board of Trade, it held on April 11, 1952 a net long position in corn futures of approximately 3,650,000 bushels, of which approximately 207,000 bushels represented bona fide hedging transactions as defined in the Act. The answer admitted that petitioner had a long position in corn futures on the Chicago Board of Trade on the date and in the quantities specified, but denied that such position violated the Act or the regulation. In support of this contention, the answer set forth various circumstances relating to the business activities of petitioner, which, it alleged, justified its total long position in corn futures on the date in question. The answer also alleged that the regulation establishing trading limits for corn futures contracts, and the Act, to the extent that it authorized the regulation, are discriminatory and violative of due process of law.
The decisive facts in this proceeding are not in dispute, and may be summarized as follows: Petitioner, a nationally known manufacturer of products made from grain corn, is the largest individual buyer of corn for wet mill processing in the United States, processing annually in excess of 50,000,000 bushels of corn. Economic operation of petitioner's plans requires that they be furnished with a continuous supply of raw corn. Over the years petitioner has found it more economical to insure a continuous supply of raw corn by the purchase of corn futures than to build storage facilities of great magnitude and stock them with sufficient corn to supply its needs for periods longer than several weeks.Futures contracts, purchased in times of low offerings, are thus used by petitioner to insure delivery of the cash commodity necessary to maintain production. Delivery is occasionally taken under the futures contract itself, but petitioner's usual practice is to trade the future for the cash commodity. The price of the future, however, represents the basic cost of corn to petitioner.
Petitioner bases its purchase of corn futures on forecasts of manufacturing requirements and expected sales of corn products and by-products. These forecasts of its business activity and raw material requirements for many months ahead are based on past experience, and have proved remarkably reliable (error less than 5%). For the period involved in this case, petitioner's forecasts indicated that it would be required, in order to meet its expected sales, to obtain delivery of over 4,000,000 bushels of raw corn a month, or an aggregate of over 25,000,000 bushels during the last six months of 1952.Petitioner purchased the corn futures involved in this case in order to insure a supply of corn during this period of the above amounts. The Judicial Officer concluded, on the basis of these facts, that petitioner's trading was not done for the purpose of speculating in price differences, but in good faith for the purpose of offsetting risks and reducing costs in its business. Nevertheless, the Judicial Officer held that these facts did not remove petitioner's transactions from the coverage of § 4a and the applicable regulation, or qualify the transactions as bona fide hedging within the meaning of the Act.
The specific situation before the Judicial Officer was:
On April 11, 1952, the petitioner held a net long position of 3,650,000 bushels in corn futures contracts calling for the delivery of corn. On the same day petitioner had outstanding contracts to sell corn products and by-products, as follows:
(a) Contracts with unaffiliated purchasers to sell dextrose, for delivery within 30 days at the market price on the day of shipment. The manufacture of the requisite amount of dextrose would require 547,000 bushels of corn. Since the marketing peculiarities of dextrose tie its sales price to that of cane sugar, which price, in turn, is fixed for periods of 30 days, the Judicial Officer concluded that the price at which dextrose was to be sold under these contracts was in effect a fixed price.
(b) Contracts with unaffiliated purchasers to sell starch, syrup, and dextrin at fixed prices, the manufacture of which would require 207,000 bushels of corn. In addition, petitioner had outstanding contracts with affiliated companies for the sale of starch, syrup, and dextrin for delivery within 30 days at the market price on the day of shipment. The manufacture of the total starch, syrup and dextrin provided for in these contracts, including the contracts with affiliated companies, would require 1,059,000 bushels of corn.
(c) Contracts with unaffiliated purchasers to sell 41,000,000 pounds of gluten feed and meal for delivery within 30 days at fixed prices, the manufacture of which would require approximately 3,090,000 bushels of corn.Since gluten feed and meal are by-products representing about 1/4 of the total yield from a bushel of corn, the same 3,090,000 bushels of corn would at the same time yield 105,000,000 pounds of starch or 130,000,000 pounds of syrup.
(d) Contracts with a wholly-owned sales subsidiary, Corn Products Sales Company, for the sale of dextrose for delivery within 30 days at fixed prices, the manufacture of which would require 2,007,000 bushels of corn.
In addition to the above outstanding contracts for the future sale of its products and by-products, the petitioner expected as of April 11, 1952, to sell to customers during the latter part of 1952, 15,225,000 pounds of cerelose, the petitioner's brand name for dextrose. The production cost of dextrose, a by-product of corn, is based upon the price of corn. However, dextrose sells in competition with cane and beet sugars, and its market price is related to sugar at an unfavorable differential of 15 or 16%. There is no commodity futures trading in dextrose. To meet the risks of non-parallelism in corn and sugar prices petitioner purchased 510,000 bushels of December corn futures and sold 7,000 long tons of raw sugar futures and 840,000 pounds of cottonseed oil futures. These purchases and sales of corn, sugar and corn oil futures were based upon reliable forecasts of the expected sales of dextrose. The closeout of these transactions as production progressed insured petitioner against loss due solely to variations in the market differential between corn and sugar. Thus the purpose and effect of these transactions was to protect the profit margins of the petitioner on future dextrose sales.
The Judicial Officer found that the transactions set forth in paragraph (a), supra, were bona fide hedging transactions; that the transactions set forth in paragraph (b), supra, were bona fide hedging transactions to the extent of 207,000 bushels of corn; that the transactions set forth in paragraph (c), supra, were bona fide hedging transactions to the extent of 770,000 bushels; and that the remaining transactions, based on contracts with affiliated companies, on contracts not containing a fixed price, or on expected sales of dextrose, were not bona fide hedging transactions within the meaning of the Act. The Judicial Officer therefore determined that futures contracts for the purchase of 1,335,500 bushels of corn should be offset against the ...