Financial overhaul could hurt farmers who use derivatives to cushion swings in markets

While the financial reform bill may have been aimed at risk-taking bankers, it may have unintended effects on family farmers, one writes in an op-ed piece for the New York Times. She is Betsy Jensen, a Minnesota wheat and soybean farmer, a farm business management instructor at Northland Community and Technical College, and the managing editor of Prairie Grains magazine. Jensen explains that she uses derivatives to protect herself against wide fluctuations in crop prices. "On the purchasing side, I also use derivatives to protect myself from swings in the cost of fertilizer, fuel and other staples," Jensen writes. "While reading through the Dodd-Frank act these past few weeks, I’ve been wondering: Will the regulations on swaps make it more difficult for me to hedge against market swings in prices for crops and supplies?"

The financial reform act states "sometime later this year it will become unlawful to enter into swaps 'in excess of such amount as shall be fixed from time to time' by the Commodity Futures Trading Commission," Jensen writes, but asks "what will that amount be, and when will we find out? What is meant by 'from time to time'?" She accepts that the intent of the reform is not to intentionally restrict family farmers like her from trading futures and even notes that the trading commission may develop special protections for them, but she still questions what unintended effects the law will have on agriculture.

She points out the effect on speculators, who buy and sell wheat or corn without taking physical control of the crops, as one area of concern. "Farmers love speculators when they are buyers, helping push prices higher, and we despise them when they are sellers, driving prices down," Jensen writes. "Regardless of their position in the market, I am well aware that the system would not function without them — there wouldn’t be enough liquidity, or money, in the market." Jensen concludes that she hopes the trading commission takes such concerns into consideration when clarifying the reform, because, "I may not be able to manage Mother Nature, but I can manage my risk with derivatives." (Read more)