Commodity producers know all too well that their businesses and livelihoods often depend on forces they can't control. Droughts, floods, interest rates and even geopolitical events can change the market for their products overnight. For that reason, end users — like farmers and ranchers — have used derivatives to hedge against price volatility for decades. Hedging common risks like volatility in gas prices, interest rate fluctuations and livestock cost increases is crucial to maintaining stable prices for consumers.
When end users enter into futures or other derivatives contracts to mitigate the risk they face from fluctuating commodity prices, they often do so through a bank registered with the Commodity Futures Trading Commission as a Futures Commission Merchant (FCM). FCMs, the vast majority of which are large banks, provide market access to their clients through their memberships at regulated exchanges and clearinghouses.
These markets are historically safe, a major reason Congress exempted them from certain regulations in the Dodd-Frank Act. Now, new bank capital requirements from the Federal Reserve's Basel III endgame and global systemically important banks surcharge proposals threaten access to these critical risk management tools for the agriculture and energy industries.
As federal regulators move toward implementing these proposals, they must keep in mind how important these markets are to communities all across America. Unfortunately, there has been minimal, if any, economic analysis done on the downstream effect these requirements will have on end users.
Los Angeles-based Lendistry — in less than two years — became the largest Black-run 7(a) lender. Its CEO credits a concerted effort by the Small Business Administration to reach out to minority lenders and businesses, whose participation in the lending program is growing.
The need for prudent risk management is more important than ever. But both proposals make it costlier for banks to centrally clear derivatives, leaving commodity producers with higher prices or less ability to hedge their risks.
The use of futures and options to hedge against market swings and minimize risk allows agricultural and energy producers more predictability in their day-to-day businesses. Ultimately this benefits consumers at the grocery store and in their energy bills. Simply put, when banks face new capital hikes, farmers' cooperatives and municipal utilities pay more to hedge risk.
The past three years have taught us that the world is unpredictable. Markets for oil, wheat, lumber and metals were rattled by global health crises, violent conflicts around the world and soaring interest rates. Yet American producers worked every day to provide energy for businesses to keep the lights on and food for our families to eat. With record-high interest rates and geopolitical instability, the need for easily accessible hedging tools is crucial for maintaining American jobs and level prices for consumers.
From a Kansas soybean farmer to some of the world's largest airlines, end users of derivatives will all be impacted by these proposed capital requirements. The proposals inadvertently harm both producers and consumers by raising the cost to responsibly hedge against risk. Ultimately, the use of these critical risk management tools should be made more accessible, not more expensive.
