NMPF pushes to keep futures options open for producers


Capital Press

The Commodity Futures Trading Commission has eased concerns about position limits for futures and swaps in a revised proposed rule.

As originally proposed, the rule would have limited legitimate hedging of milk and other dairy commodities, experts say. Its narrow definition of hedging would have labeled as speculative some common trading practices in dairy and other commodities.

Dairy traders use futures and swaps as a hedge against the price risk for themselves and their customers. The proposed rule would have stopped some of that, said Roger Cryan, vice president for milk marketing and economics for National Milk Producers Federation.

The final rule, however, broadens the definition of hedging to bona fide commodity traders and offers an exemption on position limits.

The rule is one of many that CFTC is writing under the Dodd-Frank legislation. National Milk Producers Federation was one of the agricultural organizations advising CFTC staff on ag trading. The proposed rule would have classified some legitimate hedgers as speculators because they did not have a specific anticipated commercial outlet.

In the dairy industry, as in other ag industries, those with physical positions in the market must sell or distribute that product over time and are never seen as pure speculators.

"The whole point of Dodd-Frank is to limit folks from taking advantage of the market," he said. "Our position has been to make sure that a bona fide hedge isn't treated like speculation."

Dairy traders are buying and selling physical product and are hedging their price risk, unlike paper speculators who are basically gambling in the market, Cryan said.

While the ag industry was able to gain a broad definition of a hedger, CTFC has not yet defined swaps, another type of security, Cryan said.

Another important change in the rule on position limits for the dairy industry was the elimination of a requirement that hedgers had to scale down their contract in the closing days of the contract.

That requirement is needed in commodities that operate on a delivery settlement, where buyers and sellers are forced to deliver or take product at the end of the contract. It helps prevent someone from holding a lot of contracts at the end and forcing someone else to pay a premium not to make or take delivery.

When a position is reversed ahead of the contract termination, it acts like a cash settlement at the current market price.

But it is unnecessary in the dairy market because the industry trades on cash settlement contracts, which are settled with a check at the end of the contract, based on the USDA-surveyed price, Cryan said.

If a trader is forced to sell his contract early, he might have to unload it at a loss. If large dairy hedgers had to reverse their position, it would disrupt the market in the closing days of each contract and undermine the risk-management value of the hedge, he said.

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