A CENTURY OF COOPERATION 

Dairylea O il!! A 

b r ra 1 

Cooperative Inc.<- Dairy Farmers of America 

June 16, 2009 

01~~ 

~ 0 

c:::> 

. c,Q 

-., 

.., c::__ 

c::: 

z 

0 

Mr. David Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW. 

Washington, DC 20581 COMMENT 

Re: Whether to Eliminate the Bona Fide Hedge Exemption from 

Speculative Position Limits 

Dear Secretary Stawick: 

........ 

0') 

Dairylea Cooperative Inc. (Dairylea) and Dairy Farmers of America (DF A) collectively 

request that the Commodity Futures Trade Commission (CFTC) change its policy relative to 

swap dealers being eligible for the bona fide hedge exemption and, instead, place limits on their 

speculative trading activity. We also request that speculative limits be placed on the noncommercial customers of swap dealers. 

Dairylea and DF A are cooperatives exclusively owned by dairy farmers that operate 

family businesses. Our farmer members face financial harm by unchecked speculative activity 

when it increases commodity prices regardless of underlying market fundamentals - this 

increased volatility impacts dairy farmers' cash cost of operating. Although the comments below 

are specific to dairy farmers, unchecked market speculation harms everyone who consumes these 

commodities 

Livestock feed is the life-blood of dairy farms. Without it, cows do not have the fuel 

necessary to produce milk. Although many of our dairy farmer members grow the 

preponderance oftheir feed, most purchase a significant amount in the form of pre-mixed feed 

concentrate, shelled com, soybean meal and other commodities directly impacted by feed 

commodity futures prices. As an operating expense, purchased feed is the single largest 

component - representing about one-third, but up to 50% or more of production costs. Cash feed 

commodity prices, FOB the farm, change day-to-day and month-to-month, because of changes in 

futures prices which is the benchmark used in pricing these inputs. 

In 2008, when com futures prices escalated, physical commodity prices escalated as well. 

Speculative investment decisions by participants in hedge funds and other entities result in 

commodity price appreciation not supported by factors one would associate with impacting the 

supply and demand for the underlying physical commodity. When this occurs, com~odity 

PO Box4844 

Syracuse, NY 13221-4844 

rr1 

0 

.., 

-f·O 

:r:=-r, 

rn. ~ (f) • 

rn<" 

o' 

;:tl 

~ )> 

::0 

~ 
Dairylea and DFA comments 6/16/09 cont'd 

futures prices increase and push cash prices up. This non-fundamental increase drives up dairy 

farmers' cost of production and negatively impacts their financial position. 

Your request for comments on the proposed change in regulation of swap dealers comes 

at a time when dairy farmers are suffering financial losses that may be the worst ever. U.S. dairy 

farmers are losing an estimated $74 per cow per month, on average- although farms that 

purchase a larger than average proportion oftheir feed may be losing significantly more

1

• For 

the average size farm of about 163 cows, this would be more than a $140,000 loss on an 

annualized basis. For dairy farms of 1,000 cows- which farms of this size and larger produce 

slightly more than 45 percent ofthe milk in the U.S.- the annualized loss is a staggering $1 

million or more. Dairy farmers net margins have deteriorated due to price issues impacted by the 

loss of export markets and the worldwide financial crisis, and due to higher production costs 

largely showing up in feed prices. Since the expansion of federally supported ethanol 

production, the average cost of the purchased feed component of production costs has increased 

68 percene. A large factor in this increase is due to greater demand for feedstuffs generated by 

the ethanol marketing channel. Due to the feed price inflation caused by ethanol, dairy farmers 

can ill-afford additional price inflation caused by unchecked speculative investments. 

Recently, July 2009 com futures prices have increased from $3.59 Yz per bushel in March 

to $4.18 per bushel, today, a 16 percent increase. Along with increased prices in the soybean 

complex, this has driven cash operating costs on dairy farms up significantly at a time that milk 

prices remain at levels that is estimated to average 29 percent less than production costs during 

the first six months of this year3

. 

Allowing unfettered speculation in feedstuffs to provide the opportunity of financial gain , 

to some of the wealthiest Americans and its institutions, at the risk of financial harm to dairy 

farmers and at the risk of food inflation to all Americans, is unconscionable. Although we do not 

have evidence to offer as to the impact this has on economic activity, it seems evident that the 

prudent decision would be to take initiatives to limit the opportunities for speculative activities 

that potentially can significantly harm commerce and the pocketbooks of the majority of 

Americans not able to partake in the gains of the speculative activities. 

Lynn Stout, the Paul Hastings Professor of Corporate Securities Law at UCLA, in her 

testimony to the Senate Committee on Agriculture, Forestry and Nutrition on June 4, 2009, 

stated when commenting about derivatives speculation that: "These speculative trading gains are 

purely private benefits, however, that come at other investors' expense. Meanwhile, unrestrained 

derivatives speculation has historically been linked to a host of very serious economic ills, 

including price bubbles, increased risk, reduced real economic growth, and increased fraud and 

manipulation." 

1 Dairylea has projected the average loss at $74 per cow per month. Information from others suggests that losses 

exceeding $100 per cow per day have been occurring on farms that purchase larger than average amounts of feed. 2 As projected by Dairylea using USDA data for com, soybeans and alfalfa and a utilization formula developed by 

Dairylea. The analysis indicates that purchased feed cost has risen from a 2002-2006 average of $3.72 per 

hundredweight of milk produced to $6.26 in 2009. 3 As projected by Dairylea. 

2 
Dairylea and DFA comments 6116/09 cont'd 

Michael Masters, Managing Member, Master Capital Management, LLC, in his 

testimony to the Senate Committee on Homeland Security and Governmental Affairs in May 20, 

2008, stated when asked are institutional investors contributing to food and energy price 

inflation: "Institutional investors are one of, if not the primary, factors affecting commodities 

prices today." 

The concern we present goes beyond the spot month prices. Dairy farmers forward 

contract their feed purchases - locking in feed prices months in advance of deliveries. 

Regulations allowing investors to speculate, beyond reasonable limits, in non spot months, can 

have a price distorting impact on dairy farmer feed prices. This can result in farmers locking into 

feed prices at levels much higher than the fundamentals would suggest. For some farms that 

milk large numbers of cows on a small land base, locking into a year's worth of feed prices in 

late summer/early fall, is customary. Since dairy feed is the lifeblood of the business, these 

farmers contract with neighboring farms, feed mills, or others on a yearly basis - to assure that 

they will have feed for their dairy farm. These feed purchase contracts are influenced by futures 

prices- beyond the spot month. Excessive speculative activity, beyond the spot month that 

results in rising prices, can contribute to higher feed costs for these dairy farms. 

In response to the questions posed relative to the oversight of non-commercial activities of 

swap dealers, we provide the following comments. 

1) Swap dealers that are not providing transactions for the legitimate hedge of 

underlying physical commodities should have speculative limits imposed and no 

longer be allowed to qualify for exemption under the existing bona fide hedge 

definition. 

2) A limited risk-management exemption for swap dealers is appropriate on transactions 

hedging underlying physical commodities, provided the transactions for the client are 

legitimate physical hedges. For example, if the client is a grain elevator that uses the 

swap dealer as a means of hedging its natural price risk, but also uses the swap dealer 

to place bets on copper prices, the transactions relative to copper should not carry the 

exemption. We realize this can slide into a gray area very quickly. For instance, a 

milk company that uses a swap dealer to hedge com and soybean prices, that are part 

of a milk contract whereby the plant is paying dairy cooperatives a milk price that is 

adjusted by changes in feed prices, should qualify for the exemption since the 

changes in com and soybean prices directly impact the price the plant pays for its 

milk supply. We recommend administrative latitude on the part of the CFTC, 

combined with a system of appeals for reconsideration, to handle these "gray" areas. 

3) Upon making the change, some time period should be allowed to bring swap dealers 

into compliance. 

4) Speculation that can drive energy and metal prices higher have the same ill-effect as 

speculation on feed commodities- including negatively impacting dairy farmers cost 

of production and their financial performance. Com futures for example are linked to 

3 
Dairylea and DFA comments 6/16/09 cont'd 

crude oil futures because of the relationship ofethanol to fuel prices. We believe the 

same speculative limits should apply for energy and metals, as well. 

5) Transactions for swap dealers' clients that are hedging price risk of the underlying 

physical commodity should still be considered bona fide hedgers. Guidance should 

be given to what constitutes a commercial, however, administrative discretion should 

be left to the CFTC or the self-regulatory organization, to appropriately adjust as 

necessary to the continued maturation of the derivative marketplace hedging physical 

commodity price risk. 

6) Swap dealers should self certify whether clients are commercial, report information to 

identify such and be periodically audited. Annual reports should be filed along with 

monthly reporting of new clients or changes in existing client's activity (i.e., change 

from commercial to non-commercial activities). 

7) More information is always better than less information, to the extent that it does not 

create a large financial burden for a small benefit. Transparency will be improved by 

creating subcategories as presented in the request for public comment. 

8) No comment at this time. 

9) It would be important to look through to the intermediaries to review their 

transactions and apply speculative limits to the initial counter-party, if applicable., 

For example, if a swap dealer transacted with a hedge fund, the CFTC or its 

representative should look through the transaction and apply applicable position 

limits to the hedge fund to assure the hedge fund did not work through another swap 

dealer, gaining additional speculative exposure and possibly circumventing the 

position limits. 

1 0-15) No comments at this time. 

Dairylea and DFA request that the CFTC change its policy and place limits on the 

speculative trading activity oflarge swap dealers. Doing so, will limit the speculative impact on 

feed and other commodity prices faced by dairy farmers and may lead to reduced volatility in 

commodity markets. This requested action may help limit the appreciation in operating costs on 

US dairy farms. 

Dairylea is a farmer owned agriculture marketing and service organization with more than 

2,200 members. It is the largest milk marketing organization in the Northeastern US, selling 

more than 5.5 billion pounds of raw milk annually through an extensive milk marketing network. 

Dairylea's goal is to maximize net returns at the farm by preserving and enhancing milk markets 

and milk marketing relationships, and by providing services and programs that create real value 

to our members. 

DF A is a leading dairy marketing cooperative that serves and is owned by nearly 18,000 

dairy farmers in 48 states. Through programs and services designed to help make businesses 

4 
Dairylea and DFA comments 6/16/09 cont'd 

more profitable, DF A brings added value in the form of farm lending options, health insurance, 

sustainability resources, risk management tools, member retirement plans and on-farm field and 

lab services. Through its Gold Standard Dairy Program, DF A member farms meet high 

standards in areas including animal well-being, environmental stewardship, employee training 

and milk safety and quality. In addition to marketing milk, DFA is one ofthe country's most 

diversified manufacturers of dairy products, food components and ingredients, and is a leader in 

formulating and packaging shelf-stable dairy products. 

Thank you for allowing Dairylea and DF A to comment on this important issue to the 

thousands of family business owners that own our cooperatives. 

Sincerely, 

~)r))/tJ4k Edward W. Gallagher 

Vice President 

Economics and Risk Management 

Dairylea Cooperative Inc. 

Dairy Farmers of America, Farm Services Division 

1-800-654-8838 

5