Financial Overhaul Hits Farmers

[ladycat]

Far from Wall Street, President Barack Obama's financial regulatory overhaul, which may pass Congress as early as Thursday, will leave tracks across the wide-open landscape of American industry.

But it's the derivatives portion—the part of the bill aimed directly at Wall Street—that might end up touching most lives in rural America.

http://online.wsj.com/article/SB1000...ml?mod=iGoogle

Does anyone know how this is going to affect rural dwellers and farmers? I don't really understand it.

[Cornhusker]

Really thought that through didn't he?

[Wayne02]

"When they create a new regulator, it really scares us,"

Now there is an understatement.

[ladycat]

Originally Posted by Cornhusker

Really thought that through didn't he?

Shhhhhhhhh! This isn't GC or Politics.

I'm just wondering if someone can explain what it means, and how it's going to affect us.

[PhilJohnson]

Doesn't look like it'll amount to much for the small time farmer. From what I understand is all it'll amount to is a farmer that uses derivatives as a way to lock in their target price will instead have to sell their product at what ever the market price is at the time of harvest. For fuel it means that you can't lock in a price. So one would have to buy fuel for what ever it cost instead of say locking in the price at 2.50 a gallon as provided by the article. If fuel goes up past 2.50 gallon the farmer benefits, if it goes down below 2.50 a gallon the co-op makes money. Derivatives the way I understand it (I am no financial wizard) is nothing more than a bet of what future prices may be. One person wins and the other person loses (just like gambling). My opinion, the less financial betting and gambling the better.

[wwubben]

I read a study quite a while ago where two farmers were checked out.One farmer used futures,etc.The other farmer just made cash transactions.They both were nearly equal in net profit.The cash farmer handled a lot less money and did not make money for the money changers.This is a good bill.

[sgl42]

my view is the article is long on speculation and vague scare tactics, and short on actual facts relative to the headline, ie, that it will have an impact.

The new law requires most derivatives transactions be standardized, traded on exchanges, just like corporate stocks, and funneled through clearinghouses to protect against default.

Faced with intense lobbying, Congress partially exempted businesses that use derivatives for commercial purposes. So, farmers and co-ops probably won't face new collateral requirements, for instance—although there remains a dispute over that section of the bill. Those that trade derivatives on regulated exchanges, such as the Chicago Board of Trade, are less likely to see immediate impacts than those conducting private over-the-counter deals, which will face federal regulation for the first time.

for perspective, ag "derivatives" (futures and options) have been traded on the chicago board of trade for probably a century or so. relatively few problems over that time, as far as i know. those derivatives have been in standardized for a long time. (contract size, margin requirements, etc) and the members of the chicago board of trade stand behind all the members financially, so if any member goes bankrupt, it comes out of the pockets of the other members, so they have a vested interested in making sure those who become members are reliable. according to the quote i excerpted above from the article, this is the part that is not likely to change much with the new bill.

the article tries to make this into a vague fear story with speculation, ie:

The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.

Others predict the opposite effect, pushing money from the private market to the exchanges and creating more competition that will benefit farmers.

the commodity exchanges themselves occasionally change the rules, eg, the margin requirements. if the price of pork bellies suddenly becomes very volatile, they may change the margin requirements from 10% to 15%. (i have no idea what typical margin requirements are, this is just an example.) were they to do that, that would impact the profit margins of speculators.

financial speculators of course want margins to be zero -- that gives them infinite leverage, and hence infinite profits, and if they lose, they simply declare bankruptcy and start a new company. so when faced with the prospect of having to put up a reasonable margin, make sure you whine to reporters, threaten a vague "problem" of liquidity, etc, to scare everyone into believing it'll be the end of the world.

however, keep in mind that this market has been around a century or so. i'm sure during that time the rules have changed here and there. but there's a real need for this part of the market, so i doubt it will change much.

nor is this (the standardized derivatives traded on exchanges) where the problems with the financial system are occuring. it's the off-exchange derivatives that are the problem. these are individual contracts between companies, often with no margin posted along the way, non-standard terms, and often no way to extricate yourself from the deal along the way. some derivative contracts that AIG wrote attempt to put themselves at the head of the line in the event of bankruptcy, but that hasn't been tried by a court, and may well not stand up in a legal battle. the profit margins to the big banks were huge on these deals.

in one case, a non-standardized derivative was sold to a sewer district in alabama. it made a huge underwriting profit for the bank, and initially saved the municipality a couple hundred thousand dollars a year in interest expense on couple billion dollar sewer system. however, embedded in the deal was a bet that interest rates would act a certain way, which they didn't. so after a couple years of saving a couple hundred grand, suddenly they district is having to pay out tens or hundreds of millions of dollars due to this derivative. and because it's non-standarized, they can't easily cut their losses by selling like they could with a standardized contract traded on an exchange. so, more than likely, the sewer district will end up having to declare bankruptcy. and this is the type of derivative that supposedly the new bill is designed to regulate more.

of course, no idea what actually gets put into the bill in the wee hours of the morning. but again, in my view the article is mostly scaremongering based on no real facts about what is actually in the bill, and hence poor journalism in my view.

--sgl

[Patt]

Sounds like the whole thing is one big gambling system to me. I do this really weird thing here, I harvest my stuff and then sell it for as much as I can get for it. End of story. No gambling, no buying and selling bits of paper to hedge my bets. I don't see why it is necessary, maybe someone can explain?

[silverbackMP]

Future contracts guarentee the right product for the right price at the right location. They are a benifit and lower the costs of transactions (buyer finding seller); yes people trade them and make (or loose) money but that is not their primary purpose.

[geo in mi]

Le'see, I'm betting my accounts receivable(crop in the field) on a piece of paper that might go up in value more than the amount of the crop. But then it might go down, and the price of my crop might go down, too. and then, it might rain buckets and ruin my crop, and the piece of paper might come due and I won't have any money to pay for it, and I'll have to go see my banker for a loan to cover the paper, using next year's crop as collateral--and I really don't think the combine will hold together another year, and the cost of anhydrous may go through the roof. I'm too big to fail, I need a bailout! How's a fella supposed to sleep at night, anyhow?

(geo, on the other hand, lives near a tribal casino. Every Wednesday is Senior Citizen Day, when geo goes in, gets his free roll of quarters, puts two in the slots, gets his free Senior coffee, and then goes home with the rest of the quarters. geo doesn't get rich, but he has lunch money....)

geo

[ronbre]

attempting to keep this non political ..just a reminder that your vote will help to control a lot of this Democratic out of control legistlation and spending..in Mich our primary is Aug 3..and everyone be ready for the november election and get out and vote ..your vote is your only answer to control legislation you disagree with

[dogrunner]

A simple "get out and vote" would have made your point without getting political. Once you name a party, and your opinion of that party you have made it political.

[bruce2288]

Patt It is gambling if you do not produce or consume the product. IF you do it is basically price insurance. ie you pay a premium for house insurance, You have a contract the ins. co. will pay you X amount of dollars if your house burns down. If I buy 500 steers to put in a pasture in may I can buy insurance on the price I will recieve in Sept. with a futures contract. Why say that is 300,000 in cost of cattle, what if price is low at selling time and I lose $50 a head. A loss of $25,000. Many bank will require some price protection to insure their coolateral.

[Patt]

Originally Posted by dogrunner

A simple "get out and vote" would have made your point without getting political. Once you name a party, and your opinion of that party you have made it political.

[Patt]

Originally Posted by bruce2288

Patt It is gambling if you do not produce or consume the product. IF you do it is basically price insurance. ie you pay a premium for house insurance, You have a contract the ins. co. will pay you X amount of dollars if your house burns down. If I buy 500 steers to put in a pasture in may I can buy insurance on the price I will recieve in Sept. with a futures contract. Why say that is 300,000 in cost of cattle, what if price is low at selling time and I lose $50 a head. A loss of $25,000. Many bank will require some price protection to insure their coolateral.

So if I am understanding this right the need for this basically stems from debt? Farmers are in debt to the bank every Spring for loans for seeds, feed, cattle, whatever and they need a gurantee they can make that back to pay off the loan?

Just out of curiousity when did this yearly loan system start?

[bruce2288]

Kind of like buying a house. Who today pays cash for a home? This not new during the depression banks and insurance companies ended up with huge volumes of farm land due to inability to make payments.

[Patt]

Originally Posted by bruce2288

Kind of like buying a house. Who today pays cash for a home? This not new during the depression banks and insurance companies ended up with huge volumes of farm land due to inability to make payments.

Yeah but our credit based system has dragged us into a world of hurt today!

[ladycat]

Originally Posted by Patt

So if I am understanding this right the need for this basically stems from debt? Farmers are in debt to the bank every Spring for loans for seeds, feed, cattle, whatever and they need a gurantee they can make that back to pay off the loan?

Just out of curiousity when did this yearly loan system start?

It's been going on as far back as I can remember. All the farmers around here do it.

And just from listening to the old timers talk, it was going on long before I was born.

[bruce2288]

Patt Ideally I would love to run my operation with out any borrowed money as would everyone. People would love to buy homes with out mortgages. Idealistic daydreams and reality are seldom the same.
Credit has not brought down the economy, over extension of credit ( loans beyond reasonable collateral, ability to pay it back, by both individuals, governments and institutions) has.

[deb]

Originally Posted by Patt

Sounds like the whole thing is one big gambling system to me. I do this really weird thing here, I harvest my stuff and then sell it for as much as I can get for it. End of story. No gambling, no buying and selling bits of paper to hedge my bets. I don't see why it is necessary, maybe someone can explain?

It is Gambling.

Mr. Kreutz, an outgoing 36-year-old with a sandy crewcut and sunburned neck, gave up a career in finance and took over the 2,800-acre family farm after his father's death. As he works his fields, he checks the crop futures prices on his smart phone.

This guy might be a "farmer", but if he is checking his Smartphone for crop future prices while working in the field, then he is really still working in Finance with dirt on his hands.
Deb
in wi