(Editors Note: This is a developing story. Check back for updates throughout the day: The vote in the Senate is expected to pass today in a mostly partisan vote. Two Republican Senators appear to be destined to vote in favor of the bill.)
Interviewed a day before the vote on the derivatives legislation and with the caveat that he has not read every word of the bill as it has wound its way through the legislative process, Scott Irwin, ag economist at the University of Illinois, says the impact on agriculture is a guessing game. Irwin, who has studied market players for many years, notes that the impacts on farmers and those with whom they do business will very much depend upon how the law is interpreted and enforced.
Irwin believes that of most potential direct impact to farmers is a provision that could cause a farmer — or his buyer or input supplier — to lose their hedge exemption if they engage in a single speculative trade. “Right now, to get a hedger exemption, you have to be doing hedging. It is generally loosely applied and not enforced very strictly. Under this bill, that could change.”
In the long run, the thing farmers should be most concerned with is the requirement that most over-the-counter products will have to clear through futures exchanges. “This would mean the big exchanges such as the CME would be clearing contracts on a scale never seen before,” says Irwin. “Will they grow into the category of too big to fail? Will they be able to handle the risks that such contracts might pose?”
Most of the changes in the application of speculative position limits will mainly affect energy markets and will have little impact on producers. (Read the analysis from Farm Journal Washington Editor Roger Bernard.)
Very deep in it, though, a couple provisions might have an impact on the cost of hedging, Irwin adds. “This law—aimed at making it more difficult for long-only index funds to participate in the market—would force much stricter definition of aggregration for speculators on the computation of speculative limits than in the past. Previously, limits were based on a standard of who controls the account," he says. "Now, you will be aggregated for any ownership interest in any way. So if you have a stake in a company that trades for any reason, they might force you to aggregate the speculative position. The law of unintended consequences may make it much more likely that a commercial enterprise will get caught up in these limits.”