[Federal Register Volume 63, Number 1 (Friday, January 2, 1998)]
[Notices]
[Pages 51-55]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-34189]


-----------------------------------------------------------------------

DEPARTMENT OF AGRICULTURE

Risk Management Agency


Dairy Options Pilot Program

AGENCY: Risk Management Agency, USDA.

ACTION: Advanced Notice of Availability; Request for Comments.

-----------------------------------------------------------------------

SUMMARY: This notice announces a public comment period on a new Dairy 
Options Pilot Program (DOPP) to be administered by the Risk Management 
Agency (RMA) in conjunction with the private sector. RMA plans to 
implement DOPP which would partially subsidize the purchase of put 
options for dairy producers. The objective of DOPP is to ascertain 
whether put options can provide producers with reasonable protection 
from the price risk. RMA is soliciting comments on DOPP, the method 
used to select program participants, and its information collections. 
RMA specifically requests comments on the role of brokers as outlined 
in the Broker Agreement contained in this Advanced Notice of 
Availability, whether the tasks required of the brokers including 
responsibilities listed in subsections 3(a) through 3(h), are 
appropriate and whether there are other cost-effective alternatives 
that would satisfy the program's need for accurate reporting and 
oversight while maintaining a significant role for the private sector 
in the program. The RMA was established by Public Law 104-127, on April 
4, 1996.

DATES: Submit data, comments or opinions on or before February 2, 1998. 
The comment period for information collections under the paperwork 
Reduction Act of 1995 continues through March 3, 1998.

ADDRESSES: Interested persons are invited to submit written comments on 
the DOPP to Risk Management Agency, United States Department of 
Agriculture, Office of Insurance Services, 1400 Independence Avenue, 
S.W., STOP 0830, room 6739-S, Washington, D.C., 20250-0830. A copy of 
each response will be available for public inspection and copying from 
7:00 a.m. to 4:30 p.m. EDT, Monday through Friday, except holidays, at 
the above address.

FOR FURTHER INFORMATION CONTACT: Joe Connor, Financial Analyst, 
Reinsurance Services Division, Risk Management Agency, at the 
Washington, D.C. address listed above, telephone (202) 720-4232.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act of 1995

    The Risk Management Agency is seeking comments on the following 
Information Collection Request (ICR).
    Title: Dairy Options Pilot Program.
    Respondents/Affected Entities: Parties affected by the information 
collection requirements included in this advanced notice are producers 
and brokers.
    Abstract: The dairy industry has recently witnessed unprecedented 
price volatility and, after 1999, will no longer

[[Page 52]]

be eligible to receive USDA program benefits of any kind except export 
incentives.
    The Federal Agricultural Improvement and Reform Act of 1996 (Act) 
authorized the Secretary of Agriculture to conduct, and RMA to 
administer, options pilot until December 31, 2002. RMA appreciates the 
active interest and initiative shown by the Coffee, Sugar, & Cocoa 
Exchange and the Chicago Mercantile Exchange in the development of this 
program which draws heavily from their ideas and input. If successful, 
the educational benefits of the DOPP to the producer will prepare the 
producer to manage price risk independently through the commodities 
futures and options markets.
    Estimate of Burden: Public reporting burden for this collection of 
information is estimated at 15 minutes per participant because of the 
high degree of automation associated with the data collection.
    Respondents: Producers and brokers.
    Estimated Number of Respondents: 35,329.
    Estimated Number of Responses per Respondent: 2.
    Estimated Total Annual Burden on Respondents: 16,951 hours.
    The information to be collected includes an application (Form CCC-
320), a record of all trading activity on the producer's behalf and the 
actual prices obtained by the producer for the production, and a 
voluntary survey. The information collected from the application, 
trading record and prices received by the producer will be 
electronically submitted to FCIC by the broker or brokerage firm. 
Potential respondents to this information collection are dairy 
producers, brokers, and brokerage firms. The information collected will 
be used to determine producer eligibility, to track program compliance 
and to evaluate the effectiveness of the hedge positions.
    Comments: RMA is requesting comments on the following: (a) whether 
the proposed collection of information is necessary for the proper 
performance of the functions of the agency, including whether the 
information has practical utility; (b) the accuracy of the agency's 
estimate of the burden of the proposed collection of information; (c) 
ways to enhance the quality, utility, and clarity of the information to 
be collected; and (d) ways to minimize the burden of the collection of 
information on respondents, including through the use of automated 
collection techniques or other forms of information gathering 
technology.
    Comments regarding paperwork reduction should be submitted to the 
Desk Officer for Agriculture, Office of Information and Regulatory 
Affairs, Office of Management and Budget, Washington, D.C. 20503.
    The Office of Management and Budget (OMB) is required to make a 
decision concerning the collections of information contained in this 
notice between 30 and 60 days after submission to OMB. Therefore, a 
comment to OMB is best assured of having full effect if OMB receives it 
within 30 days of publication. This does not affect the deadline for 
the public to comment on the notice.

Executive Order 12866

    OMB has determined this notice to be significant for the purposes 
of Executive Order 12866 and, therefore, this notice has been reviewed 
by OMB.

Cost-Benefit Analysis

    The program is designed to increase the level of understanding of 
options contracts as risk management tools among dairy producers and to 
explore their specific applicability to the dairy industry. The costs 
to the Government of options premium under the program are estimated to 
be about $10 million annually. If successful, the program will help 
create liquid markets in basic formula price (BFP) futures and options 
contracts which would be sustained, in part, by the on-going hedging of 
output price risk by dairy producers benefiting from the educational 
aspect of the program. Under that scenario, the benefits of the program 
would include furnishing producers with a viable price risk management 
alternative, exerting a stabilizing influence on the dairy industry, 
and contributing to the Department's goals of supporting market 
oriented reforms in the agricultural sector.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. This notice contains no Federal 
mandates (under the regulatory provisions of Title II of the UMRA) for 
State, local, and tribal governments or the private sector. Therefore, 
this notice is not subject to the requirements of sections 202 and 205 
of the UMRA.

Executive Order 12612

    It has been determined under section 6(a) of Executive Order 12612, 
Federalism, that this notice does not have sufficient federalism 
implications to warrant the preparation of a Federalism Assessment. The 
provisions contained in this notice will not have a substantial direct 
effect on States or their political subdivisions, or on the 
distribution of power and responsibilities among the various levels of 
government.

Regulatory Flexibility Act

    This notice will not have a significant impact on a substantial 
number of small entities. The provisions included in this notice will 
not impact small entities to a greater extent than large entities. All 
participants will be required to fill out an application and provide 
documentary evidence of monthly production for at least the previous 
six months. The amount of work required of brokers will only increase 
slightly because the information to determine the eligibility of 
producers and trading activities is already collected by brokers 
specializing in hedge positions and the only additional burden is 
collecting the price for the sale of production and the electronic 
transmittal of this information. Therefore, this action is determined 
to be exempt from the provisions of the Regulatory Flexibility Act (5 
U.S.C. 605) and no Regulatory Flexibility Analysis was prepared.

Federal Assistance Program

    This program is not currently listed in the Catalog of Federal 
Domestic Assistance under No. 10.450.

Executive Order 12372

    This program is not subject to the provisions of Executive Order 
12372, which require intergovernmental consultation with State and 
local officials. See the Notice related to 7 CFR part 3015, subpart V, 
published at 48 FR 29115, June 24, 1983.

Executive Order 12988

    This notice has been reviewed in accordance with Executive Order 
No. 12988 on civil justice reform. The provisions of this notice will 
not have retroactive effect. The provisions of this notice will preempt 
State and local laws to the extent such State and local laws are 
inconsistent herewith. The administrative appeal provisions published 
at 7 CFR part 11 must be exhausted before action against RMA for 
judicial review may be brought.

Environmental Evaluation

    This action is not expected to have any significant impact on the 
quality of the human environment, health, and safety. Therefore, 
neither an

[[Page 53]]

Environmental Assessment nor an Environmental Impact Statement is 
needed.

Background

    Section 191 of the Federal Agricultural Improvement and Reform Act 
of 1996 authorizes the Secretary of Agriculture to conduct a pilot 
program for one or more agricultural commodities to determine the 
feasibility of the use of futures and options as risk management tools 
to protect producers from fluctuations in price, yield and income. 
Accordingly, the Secretary has directed the RMA to develop the DOPP.
    The intent of this notice is to solicit public comments on DOPP. 
DOPP will not be published as a proposed or final rule unless the 
program is offered to all producers on a nationwide basis. DOPP will be 
in effect when applications and contracts are made available by RMA and 
producers are provided actual notice of availability.
    DOPP is intended to offer a risk management tool to dairy producers 
to offset the unprecedented price volatility, the elimination of price 
supports, and the current unavailability of production insurance. DOPP 
will be offered on a pilot basis to determine the feasibility of using 
commodity futures and options markets.
    The program represents a joint initiative between RMA and the 
private sector. DOPP was first proposed to RMA by the Coffee, Sugar & 
Cocoa Exchange (CSCE). During the development of this program, the 
Chicago Mercantile Exchange (CME) provided additional recommendations. 
If successful, the educational benefits of DOPP will prepare producers 
to manage their price risk independently through the commodities 
futures and options markets.
    DOPP is scheduled for initial implementation in thirty-six counties 
(six counties in each of six states). The program will be available in 
those states and counties as determined by RMA. The participation limit 
per county is set at 150 producers, subject to adjustments as described 
below. Counties with a higher number of participants signing-up will 
have participants selected through a lottery. Applicants who miss the 
opportunity to participate the first time the program is offered will 
get preference the next round. When a county has fewer than the maximum 
number of participants, the excess program vacancies will be pooled and 
distributed among counties where more than the maximum number has 
signed up. Producers wishing to participate in the program must fill 
out an application (Form CCC-320).
    The program will last six months for each round of participants. 
For example, if registration and required training take place in 
December, the producer would begin buying options in January. The 
participant would be required to take options positions at least two 
months in the future to ensure some time in the position to allow for 
the educational benefits for the participant. Therefore, the producer 
would purchase options on the Basic Formula Price (BFP) futures for any 
of the months from April through September.
    In order to introduce the new trading volume on to the markets 
slowly, each round of participants will commence trading at different 
times by state. RMA will also consider other phase-in ideas.
    The two exchanges where the BFP futures and put options are 
currently available are the CSCE and the CME. The contracts on the two 
exchanges differ with regard to quantity. Under the program, a 
participating producer will be permitted to purchase contracts to hedge 
between 200,000 and 600,000 pounds of milk over a six-month period. 
Producers will be required to submit documentation supporting their 
operation's production of at least 200,000 pounds of milk over a six-
month period.
    RMA will enter into contracts with producers and brokers who elect 
to participate in DOPP.
    Notice: The terms and provisions for the DOPP Producer Contract are 
as follows: United States Department of Agriculture, Risk Management 
Agency, Dairy Options Pilot Program Contract.
    Participation in the Dairy Options Pilot Program is voluntary. 
Neither the United States, the Commodity Credit Corporation, the 
Federal Crop Insurance Corporation, the Risk Management Agency, the 
Department of Agriculture, nor any other Federal agency is authorized 
to guarantee that participants in this pilot program will be better or 
worse off financially as a result of participation in the pilot program 
than the producer would have been if the producer had not participated 
in the pilot program.

1. Definitions

    Application. Form CCC-320 that is required to be completed and 
signed by the producer before the producer is eligible to participate 
in this program.
    Basic formula price. The price established by the Department of 
Agriculture, and provided to the marketing order administrators to be 
used to set regional minimum prices, used in calculating the gains or 
losses under a put option.
    Broker. A broker or brokerage firm registered under the Commodities 
Exchange Act that has entered into an agreement with RMA to participate 
in the program.
    CME. Chicago Mercantile Exchange.
    CSCE. Coffee, Sugar, and Cocoa Exchange.
    Eligible markets. Commodity futures and options markets designated 
as contract markets under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.).
    Exercise. The action taken by the holders of a put option on a 
futures contract if they wish to sell the underlying futures contract.
    Expiration Date. The last date on which the put option may be 
exercised.
    Futures contract. A contract to buy or sell a commodity on an 
eligible market at some point in the future.
    Open outcry. Method of public auction required to make bids and 
offers in the trading pits, or rings, of commodity exchanges.
    Out-of-the-money. Put option whose strike price is less than the 
underlying futures contract price.
    Premium. The price of a put option determined by open outcry. The 
premium does not include related brokerage commission fees.
    Producer. An individual, entity, or joint operation, which as 
owner, operator, landlord, tenant, or sharecropper, is entitled to 
share in the production available for marketing from the farm, or share 
in the proceeds thereof.
    Program. The Dairy Options Pilot Program.
    Put Option. A contract traded on eligible markets that gives the 
buyer the right to sell the underlying futures contract at the strike 
price on or before the expiration date.
    RMA. Risk Management Agency, an agency of the United States 
Department of Agriculture.
    Sale. Transfer of title through the selling of the value of the put 
option.
    Settlement price. The price of a specific put option as published 
by the exchange on which that contract trades at the end of each day's 
trading.
    Strike price. The price at which the holders of a put option may 
choose to sell the underlying futures contract.

2. Eligibility

    (a) To be eligible for any benefits under this contract, a producer 
must:
    (1) Be eligible for a production flexibility contract, a marketing 
assistance loan or any other assistance under the Federal Agricultural 
Improvement and Reform Act of 1996;
    (2) Volunteer to participate in this program;
    (3) Operate a farm located in a county selected for the pilot 
program; and

[[Page 54]]

    (4) Have documented production history of at least 200,000 pounds 
over the most recent six months.
    (b) This program is available to producers in states and counties 
as designated by RMA.

3. Responsibilities

    (a) Producers who elect to participate in the program agree:
    (1) To attend not less than one training session conducted by RMA 
to educate the producer on the program's operation and the use of put 
options.
    (2) To buy put options on a minimum of 200,000 pounds of milk on an 
eligible market, through an eligible broker, at some time over the 
first two months of the program's six-month duration beginning on the 
date the producer attends a training session;
    (3) That put options on no more than 200,000 pounds of milk will be 
purchased for any one month under this program;
    (4) That the put options will be purchased at least two months 
before the put options expire.
    (5) That the put options will be purchased at a strike price that 
is at least 25 cents out of the money;
    (6) That no put options will be sold or exercised before four weeks 
prior to the expiration date. (The producer may sell or exercise 
options purchased under this program at any time over the four weeks 
leading up to the expiration date.) If the producer exercises the put 
option and holds the futures contract, the producer assumes the risk of 
any losses; and
    (7) The producer shall keep detailed records of each transaction 
including the purchase date and cost of each put option, the expiration 
date and month of the put options, the producer's cash market price for 
milk over the period of participation in the program, the difference 
between the cash market price and the BFP over the six-month duration 
of the program, whether the options were sold or exercised and, if sole 
or exercised, the date, and price of the futures contract on the date 
of sale or exercise.
    (c) A producer must establish an account with a broker to 
participate in the program.

4. Costs

    (a) The producer will pay 20 percent of the premium of each put 
option.
    (b) RMA shall pay transactions costs equal to $30 per round turn 
and 80 percent of the premium.
    (c) The broker will charge the producer's account for 20 percent of 
the premium per put option, and the transaction costs and the balance 
of the premium will be billed to RMA.

5. Restrictions and limitations

    (a) Except as stated herein, total program participation will be 
limited to 150 producers per county. If more participants are enrolled 
than the county limit, a lottery will be held by RMA to determine 
participants within a county. If fewer than 150 participants are 
enrolled in a county, the number of unfilled participation slots will 
be pooled and redistributed over counties where enrollment exceeds 150.
    (b) The producer will be able to order put options from a broker 
after:
    (1) Providing the broker with a completed copy of the application;
    (2) Providing marketing receipts of the producer's monthly 
production for the most recent six month period; and
    (3) The broker has received verification from RMA of the producer's 
selection as a program participant.
    (c) If a producer who has participated in the program is not in 
compliance with the provisions of this contract, the producer will be 
required to repay any premiums paid by RMA on behalf of the producer, 
in addition to any damages determined by RMA.
    (d) No put options purchased through this program shall be 
purchased at a premium that is more than 160 percent of the previous 
day's settlement premium.

6. Other

    (a) The National Futures Association, on behalf of the Commodity 
Futures Trading Commission, maintains a current listing of brokers and 
brokerage firms who are licensed to conduct futures-related business. 
However, only those brokers who have entered into an agreement with RMA 
will be eligible to trade put options under this program. To obtain a 
list of brokers approved by RMA, contact RMA at (202) 720-0191.
    (b) To assist in the evaluation of the program, producers 
participating in the program may be asked to complete entry and exit 
surveys by RMA. While completion of these surveys is voluntary, 
producers are encouraged to do so in order that an accurate assessment 
may be made of this program's overall effectiveness.
    (c) There may be tax consequences with respect to participation in 
this program. Producers interested in participating in the program who 
have questions regarding the tax issues associated with this program 
should seek the advice of a competent tax advisor who is familiar with 
put options.
    (d) RMA is required to report all program payments issued on behalf 
of producers to the Internal Revenue Service (IRS). All premiums that 
are paid by RMA on behalf of producers participating in this program 
shall be reported to the IRS for the year of participation.
    Notice: The terms and conditions for the DOPP broker agreement are 
as follows: United States Department of Agriculture, Risk Management 
Agency, Broker Agreement for the Dairy Options Pilot Program.

1. Definitions.

    Application. Form CCC-320 that is required to be completed and 
signed by the producer before the producer is eligible to participate 
in this program.
    Basic formula price. The price established by the Department of 
Agriculture, and provided to the marketing order administrators to be 
used to set regional minimum prices, used in calculating the gains or 
losses under a put option.
    Broker. A broker or brokerage firm registered under the Commodities 
Exchange Act that has entered into an agreement with RMA to participate 
in the program.
    CME. Chicago Mercantile Exchange.
    CSCE. Coffee, Sugar, and Cocoa Exchange.
    Eligible markets. Commodity futures and options markets designated 
as contract markets under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.).
    Exercise. The action taken by the holders of a put option on a 
futures contract if they wish to sell the underlying futures contract.
    Expiration Date. The last date on which the put option may be 
exercised.
    Futures contract. A contract to buy or sell a commodity on an 
eligible market at some point in the future.
    Open outcry. Method of public auction required to make bids and 
offers in the trading pits, or rings, of commodity exchanges.
    Out-of-the-money. Put option whose strike price is less than the 
underlying futures contract price.
    Premium. The price of a put option determined by open outcry. The 
premium does not include related brokerage commission fees. The premium 
is the maximum amount of potential loss to which the put option buyer 
may be subject.
    Producer. An individual, entity, or joint operation, which as 
owner, landlord, tenant, or sharecropper, is entitled to share in the 
production available for marketing from the farm, or share in the 
proceeds thereof.
    Program. The Dairy Options Pilot Program.
    Put Option. A contract traded on eligible markets that gives the 
buyer the

[[Page 55]]

right to sell the underlying futures contract at the strike price on or 
before the expiration date.
    RMA. Risk Management Agency, an agency of the United States 
Department of Agriculture.
    Round turn. The broker's service in transacting a single put option 
consisting of consultation services and the purchase and liquidation 
(sale or exercise) of a put option, including the subsequent sale of 
the underlying futures position if the put option is exercised.
    Sale. Transfer of title through the selling of the value of the put 
option.
    Settlement price. The price of a specific put option as published 
by the exchange on which that contract trades at the end of each day's 
trading.
    Strike Price. The price at which the holders of a put option may 
choose to sell the underlying futures contract.

2. Eligibility

    (a) To be eligible for trade options under this agreement, a broker 
must:
    (1) Be properly licensed and in good standing with the National 
Futures Association;
    (2) Volunteer to participate in this program; and
    (3) Execute this agreement and comply with all its terms and 
conditions.

3. Responsibilities

    (a) Brokers who elect to participate in the program agree to 
enforce the following program requirements with respect to any producer 
participating in the program who might use the broker's services:
    (1) To buy put options on a minimum of 200,000 pounds of milk on an 
eligible market at some time over the first two months of the program's 
six-month duration beginning on the date the producer attends a 
training session conducted by RMA;
    (2) That put options on no more than 200,000 pounds of milk shall 
be purchased for any one month under this program;
    (3) That put options will be purchased at least two months before 
the put options expire;
    (4) That the put options will be purchased at a strike price that 
is at least 25 cents out of the money; and
    (5) No put options will be sold or exercised before four weeks 
prior to the expiration date. The producer may sell or exercise options 
purchased under this program at any time over the four weeks leading up 
to the expiration date.
    (b) Brokers who participate in the program must collect from the 
producer:
    (1) A signed copy of the application (Form CCC-320);
    (2) Marketing receipts of the production history of the producer 
for at least the most recent 6 month period; and
    (3) The cash market price for the producer's production at the time 
of each order and liquidation.
    (c) Broker's should not accept applications from any producer whose 
marketing receipts do not evidence production of at least 200,000 
pounds over the most recent six months.
    (d) The broker must keep detailed records of each transaction 
including:
    (1) The purchase date and premium for each put option;
    (2) The expiration date and month for each put option;
    (3) The producer's cash market price for the production at the time 
of each order and liquidation;
    (4) The difference between the cash market price and the BFP over 
the six month duration of the program; and
    (5) Whether the options are sold or exercised and, if sold or 
exercised, the date and price of the futures contract on the date of 
sale or exercise.
    (f) The broker must transmit to RMA, through electronic data 
transmission, the information contained on the application and 
information specified in subsection (f). Brokers certify that systems 
used to transmit data will be Year 2000 compliant, i.e., be able to 
accurately process date/time data (including, but not limited to, 
calculating, comparing, and sequencing) from, into, and between the 
twentieth and twenty-first centuries, and the years 1999 and 2000 and 
leap year calculations, and to properly exchange date/time data with 
other information technology. Data transmission requirements and Year 
2000 compliancy guidelines are available upon request.
    (g) The broker can not conduct any trades under this program on 
behalf of any producer until notified by RMA that the producer has been 
accepted into the program.

4. Costs

    (a) The broker will receive a transaction fee of $30 per round turn 
from RMA. Any transactions costs agreed upon between the broker and a 
producer in excess of $30 will be the sole responsibility of the 
producer and not of RMA.
    (b) The broker will charge the producer's account for 20 percent of 
the premium per put option. The 20 percent of the transaction for which 
the producer is responsible is the sole responsibility of the producer 
and not of RMA.
    (c) The broker will bill the transaction costs and the balance of 
the premium to RMA.

5. Restrictions and Limitations

    (a) If a broker participating in the program through this agreement 
is not in compliance with the provisions of this agreement, the broker 
will be required to repay any transactions costs on the put options 
subsidized by RMA and traded by the broker under the program, in 
addition to any damages suffered by RMA.
    (c) No put options purchased through this program shall be 
purchased at a premium that is more than 160 percent of the previous 
day's settlement premium.

6. Other

    (a) To assist in the evaluation of the program, brokers 
participating in the program may be asked to complete entry and exit 
surveys by RMA. While completion of these surveys is voluntary, brokers 
are encouraged to do so in order that an accurate assessment may be 
made of this program's overall effectiveness.
    (b) RMA is required to report all program payments issued on behalf 
of producers to the Internal Revenue Service (IRS). All premiums that 
are earned by producers participating in this program shall be reported 
to the IRS for the year of participation.

    Signed in Washington, D.C., on December 29, 1997.
Garland Westmoreland,
Acting Administrator, Risk Management Agency.
[FR Doc. 97-34189 Filed 12-31-97; 8:45 am]
BILLING CODE 3410-08-P