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Dodd-Frank Act Could Limit Risk Management Tools

February 11, 2011
 
 

 

 
Source: Dairy Farmers of America

The ability to manage against risk has become increasingly important for dairy farmers in the face of persisting low milk prices and rising input costs. However, certain provisions of the Dodd-Frank Act may impact cooperatives’ ability to offer price risk management tools to producers in the future, Edward Gallagher, president of Dairy Risk Management Services, a division of Dairy Farmers of America, Inc. (DFA), told the House Committee on Agriculture during a hearing this week.

In his testimony, Gallagher expressed concern that the proposed rules related to definitions and capital margins within Dodd-Frank could regulate farmer cooperatives as swap dealers and result in increased requirements for posting capital and margin, complying with reporting, record keeping and other regulatory requirements — ultimately increasing costs and inhibiting cooperatives’ ability to provide price risk management tools to producers.  

 “Due to market volatility in recent years, cooperatives are increasingly using over the counter (OTC) derivatives to help producers manage price risk and assist them in locking in margins or creating insurance-like margin safety nets,” Gallagher said.

He described how a cooperative can aggregate its members’ small-volume hedges or forward contracts and transfer that risk to a swap partner. A swap dealer or other commercial counterparty would otherwise not have the interest in servicing such small entities, he explained.

“We support bringing more transparency and oversight to the OTC derivatives markets,” said Gallagher, who also serves on the National Council of Farmer Cooperatives Commodity Futures Trading Commission working group. “At the same time, it is vitally important that our members are able to utilize forward contracting transactions with their cooperatives to mitigate their commercial business risk.”

To prevent unintended negative consequences of the proposed rule, Gallagher advocated for treating agricultural cooperatives as end-users and exclude agricultural cooperatives from the definition of a swap dealer. Additionally, he recommended exempting agricultural cooperatives from mandatory clearing or margining, but allowing them to perform either at their discretion.

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