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.
Neither the IBAA nor the American Bankers Association has taken a formal position on the three-year pilot program, but both trade groups are encouraged by the possibilities.
"Farmers need as many ways to market their products as possible, and bankers should support that," said John M. Blanchfield, manager of the ABA's agricultural bankers division.
Still, some bankers said the program will only help them if their borrowers participate. Charles I. Moyer, chairman and chief executive officer of First National Bank and Trust, Phillipsburg, Kan., said most farmers are intimidated by futures contracts sold on the commodities exchanges. So rather than hedging, they try to ride out periods of low prices.
Mr. Moyer estimated that 60% of his bank's farm borrowers are not hedging their risk properly because they do not understand how trade options work.
Mr. Scanlan of the IBAA said banks could help farmers overcome their fears through educational programming. Many banks, such as Towner County State Bank in Cando, N.D., offer risk-management classes to farmers each winter to teach them about hedging methods.
Farmers may have more incentive to learn about risk-management tools this year as prices for crops remain low due to the Asian economic meltdown and waning government price supports, said the ABA's Mr. Blanchfield.
And the banks may be able to sell options contracts to their own farm borrowers if a bill proposed by Sen. Pat Roberts, R-Kan., becomes law. His bill would expand the Futures Commission's pilot program to include community banks as contract vendors. Passage is unlikely, however, because of a shortened election-year legislative calendar and opposition from the commodities exchanges, Mr. Scanlan said.