Agriculture: Commodity Options Plan May Benefit Farm Banks

By Pavlenko-lutton, Laura | American Banker, May 6, 1998 | Go to article overview

Agriculture: Commodity Options Plan May Benefit Farm Banks


Pavlenko-lutton, Laura, American Banker


A federal agency has launched a new program designed to help farmers protect themselves against falling commodities prices.

The Commodity Futures Trading Commission, which regulates commodities markets, unveiled a pilot program last month that lets large grain elevator co-operatives, crop marketing firms, and other private organizations sell commodity options contracts directly to farmers.

The contracts give farmers the right to sell their crops for a set price on a specified date. Under the old rules, such trade options were sold only through national exchanges, such as the Chicago Board of Trade.

Bank industry experts said the program could help bankers because it gives their farm customers an option to lock in prices for their livestock and grain, oil seed, and cotton. That, in turn, diminishes the chance that farmers will default on loans during periods of low prices.

"People are looking for new ways to manage risk, and this seems to be a good first step," said Mark K. Scanlan, agriculture representative at the Independent Bankers Association of America.

But lenders themselves are taking a wait-and-see approach to the program because they are unsure whether their farm customers will buy contracts already available through exchanges.

"The tools are already in place," said James J. Molloy, president and chief executive officer of First State Bank, Conrad, Iowa. "It depends on whether the farmers choose to use them."

The Futures Commission began debating the merits of lifting a 62-year- old ban on off-exchange options sales last year, in response to the 1996 Farm Bill.

Over time, that bill will eliminate the price supports farmers get from the government. These supports have acted as an income guarantee for producers, so in their absence, the commission decided that farmers need additional ways to minimize price risk. …

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Agriculture: Commodity Options Plan May Benefit Farm Banks
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