Washington, D.C. (February 10, 2011)—As the Commodities Futures Trading Corporation (CFTC) implements provisions of the Dodd-Frank Act involving over the counter (OTC) derivatives, the Commission must ensure that farmer co-ops can continue to effectively manage risk and offer hedging tools to their farmer-owners, a representative of the National Council of Farmer Cooperatives (NCFC) said today.
The comments were made by Ed Gallagher, president of Dairy Risk Management Services, a division of Dairy Farmers of America, and vice president of risk management for Dairylea Cooperative, at a House Committee on Agriculture hearing looking at implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“Due to market volatility in recent years, cooperatives are increasingly using OTC products to help them diversify their exposure by customizing their hedges,” Gallagher testified. “In addition, OTC derivatives offer cooperatives the ability to provide specialized products to farmers and ranchers to help them better manage their risk and returns. A co-op can aggregate its owner-members’ small volume hedges or forward contracts and offset that risk with a futures contract or by entering into another customized hedge via the swaps market.”
For an example, Gallagher discussed the ways in which his co-op helps their dairy farmer members hedge against increases in feed prices. Without the co-op involvement, he emphasized, individual producers would be unable to mitigate this risk effectively.
“Many producers are not able to use the futures markets to hedge input risk because of the larger volumes underlying the relevant futures contracts,” Gallagher said in his written testimony. “Furthermore, corn and soybean contracts do not trade on a monthly basis—while most of our members purchase feed on a monthly basis.”
A wide variety of farmer co-ops, including those in the grain and livestock sectors, use OTC derivatives to offer similar products.
Gallagher closed his testimony by outlining the actions needed to ensure that producers continue to have access to these risk management tools through the co-ops that they own.
“NCFC believes that agricultural cooperatives should be treated as end-users since they aggregate the commercial risk of individual farmer-members and are treated as such by the CFTC currently,” he concluded. “In addition, we seek an exclusion of farmer cooperatives from the definition of a swap dealer and an exemption of farmer co-ops from mandatory clearing or margining.”
Since 1929, NCFC has been the voice of America’s farmer cooperatives. Our members are regional and national farmer cooperatives, which are in turn composed of nearly 3,000 local farmer cooperatives across the country. NCFC members also include 26 state and regional councils of cooperatives. Farmer cooperatives allow individual farmers the ability to own and lead organizations that are essential for continued competitiveness in both the domestic and international markets.
America’s farmer-owned cooperatives provide a comprehensive array of services for their members. These diverse organizations handle, process and market virtually every type of agricultural commodity. They also provide farmers with access to infrastructure necessary to manufacture, distribute and sell a variety of farm inputs. Additionally, they provide credit and related financial services, including export financing.