| MARCH 5, 2011 -- On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The bill, proposed by Congressman Barney Frank and Senator Chris Dodd, and so named, came as a result of the 2008 financial meltdown and seeks to implement new regulatory reforms to the financial services industry, aka- Wall Street. Reform in this case has meant greater transparency in the markets, tougher standards on fraud manipulation, more authority over insider trading, and greater protection for whistle blowers.
Overall, the question became: what is sufficient manipulation/regulation to ensure sound pricing without the cost outweighing the benefits? Sounds pretty straightforward right? Well…not so much. Though unlikely to receive funding due to increasing budget cuts, the Act would have had numerous effects on agriculture.
Primarily, the Act could affect agriculture by addressing “commodity swaps” and giving a precise definition of a “commodity.” Commodity swaps are typically used as a hedging device to protect one’s self against the rising or falling price of a commodity. For example, say a company buys a lot of oil. This company can buy a contract, or pay a premium, for the legal right to purchase oil at a fixed price for a certain amount of time.
This could potentially save them millions in the long run, making the premium paid for those contracts seem like nothing. Dodd-Frank has repealed all exemptions granted to security-based swaps. Though the exact terms aren’t yet clear, Title VII states; “Except as provided otherwise, no Federal assistance may be provided to any swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity" (Thomas).
This mandate could affect farming cooperatives if the Commodity Futures Trading Commission (CFTC) decides to define them as swap dealers rather than farm cooperatives and thus subjecting them to the regulations and capital requirements imposed on swap dealers. This could have dramatic impacts on people such as dairy farmers by hindering their ability to manage the risk of falling milk prices and rising production costs, a risk that could usually be transferred to a swap dealer through a commodity swap. A solution to this problem would be to term cooperatives, such as Dairy Farmers of America, as end-users rather than swap dealers, and exempting agricultural cooperatives altogether. Clearly, definitions become incredibly important at this point, and are primarily left to the discretion of the CFTC. Before this Act, “commodities” wasn’t so much a noun as it was a reference to a group of investment securities; some popular ones being oil, coffee, corn, cotton, and pork bellies. Without a precise definition, it will be much harder to know who to exempt and who to impose regulations on. Consequently, without exemption, growers will have to assume the financial risk associated with commodity price fluctuations, leaving America’s farmers incredibly vulnerable.
Having a degree in finance, I was eager to right this blog, and found it fairly easy to do so. However, what I could never have comprehended a year ago is the far reaching impact imposed legislation could have on the different sectors of America. In this instance, a bill directed at keeping Wall Street honest could have come back to wreak havoc on America’s farmers and agricultural communities. Let’s hope that the current budget cuts end up eliminating funding for the Dodd-Frank Act, otherwise we could find ourselves paying more for a gallon of milk than a barrel of oil.
-Grace Boatright
National Grange Program Assistant |
