New Derivatives Rules Must Preserve Risk Management Options for Farmers, Co-ops


Washington, D.C. (February 10, 2011)—Implementation of new regulations on derivatives and the over-the-counter (OTC) swaps market should preserve the ability of farmer-owned cooperatives to offer their members new, innovative and customized risk management products and services, testified the National Council of Farmer Cooperatives’ (NCFC) President and CEO Chuck Conner today.

Conner’s comments came at a hearing held by the Senate Committee on Agriculture, Nutrition and Forestry hearing looking at Commodity Futures Trading Commission’s (CFTC) implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Due to market volatility in recent years, cooperatives are using more OTC products to better manage their exposure by customizing their hedges.  This practice increases the effectiveness of risk mitigation and reduces costs to the cooperatives and their farmer-owners,” Conner testified.

He also focused on the role farmer co-ops are increasingly playing in offering their member-owners new tools to help mitigate the risk posed by increasingly volatile commodities markets. For example, many producers are not able to use the futures markets to hedge input risk because of the larger volumes underlying the relevant futures contracts. Farmer co-ops aggregate these small volume hedges and forward contracts and then offset the risk by entering into customized hedges via the OTC swaps markets.

“More producers are depending on their cooperatives to provide them with these tools to manage price risk, and to assist them in locking in margins,” said Conner. “More producers are depending on their cooperatives to provide them with these tools to manage price risk, and to assist them in locking in margins.”

NCFC and its members are concerned with how the CFTC ends up defining a number of terms in the Act, including defining swaps dealers. Regulations could sweep farmer cooperatives up in to regulations that Congress intended to apply only to very large systemically important financial institutions.

“Imposing [these regulations] on co-ops would mean increased financial requirements and other regulatory costs.  This, in turn, could make offering these services to farmer-members uneconomical,” Conner concluded. “Such action would result in the unintended consequence of increasing risk in the agricultural sector.  We do not believe this was Congress’s intention and would urge this committee to reiterate that with the CFTC.”

About NCFC
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.

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