Dairy Options Pilot Program

DEPARTMENT OF AGRICULTURE

Risk Management Agency

Dairy Options Pilot Program

AGENCY: Risk Management Agency, USDA.

ACTION: Advanced Notice of Availability; Request for Comments.

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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

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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

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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

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(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

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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