Commentary: Dodd-Frank shouldn’t end swaps at year end
Editorial Op-Ed first appeared in the Des Moines Register
Federal regulators roiled farmers across America with the release of new rules for financial instruments on Aug. 27. The Commodity Futures Trading Commission, one of the agencies charged with implementing the Dodd-Frank Wall Street Reform Act, officially announced the new requirements and said they would take effect by year’s end.
What does Dodd-Frank, passed in response to the 2008 economic crisis and aimed at reforming a vast swathe of the financial sector, have to do with farmers?
Among the instruments covered by the commission’s new proposals are agricultural commodity “swaps.” Basically, swaps empower farmers, ranchers, agribusinesses and other food suppliers to hedge against certain risks common to their trade, like bad weather or a crash in the price of a food item they sell.
Swaps might sound like they serve some distant, exotic purpose far removed from the lives of average Americans. But they play a key role in providing food producers with a basic level of financial security through tough times, which helps to ensure price stability for consumers.
Consequently, the way the commission imposes Dodd-Frank rules on these instruments will have a profound effect on Americans’ pocketbooks. And right now, all signs indicate the commission’s approach to implementing Dodd-Frank is going to inadvertently smother agricultural swaps with over-regulation.
In the rush to prevent another crisis, it has cast its net too wide. As a result, Dodd-Frank could make risk management significantly more costly for America’s farmers, driving up volatility in the market and potentially leading to huge price increases for consumers.
The commission’s new rules affect agricultural commodity swaps that aren’t sold on exchanges and don’t run through third-party intermediaries — so-called “over-the-counter” swaps.
Consider a bread baker in Kansas City. He buys thousands of pounds of flour each year. Because of this year’s droughts, though, he’s worried that America’s wheat supply will shrink, driving up flour prices over the next 12 months.
So, to hedge against a price spike, he buys $10,000 in over-the-counter flour swaps today to guarantee that next year he can purchase 10,000 pounds of flour for $1 per pound. In 12 months, if the price of flour is dramatically higher, he’ll have saved himself a huge amount of money. The price could also be lower, of course, but that’s the risk he runs in order to guarantee he won’t go bankrupt.