Wednesday, July 14, 2010

Agriculture, Derivatives, and the new Financial Reform Bill

"The first derivatives were crop futures, which appeared in the U.S. at the end of the Civil War and became a standard facet of business for companies across America."

And that is why derivatives are regulated by the Agriculture Committee, something that seems to mystify most people.

Today's WSJ has a front page article anticipating how the new financial reform bill might impact rural America in the greatest way, and that is in regulation of derivatives. The article uses rural Nebraska as its location. Twenty-five percent of that areas farmers use hedging as part of their business model for grain and livestock production, as well as fuel and other costs of production.

Finance Overhaul Casts Long Shadow on the Plains

For a link to its graphic showing how farmers use derivatives, click here.

It is interesting how much the value of these commodity derivatives has fallen the past two years:


Bottom Line
As with many aspects of the new 2,500 page reform bill, how it plays out remains to be seen. At this point it is too early to know whether it will result in increased costs or availability to perform hedging transactions used by farmers but it is creating nervousness amongst those who rely on using these derivatives.