Dairy Options Pilot Program

DEPARTMENT OF AGRICULTURE

Risk Management Agency

RIN 0563-AB61

Dairy Options Pilot Program

AGENCY: Risk Management Agency, USDA.

ACTION: Notice of Availability.

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SUMMARY: This notice announces the availability of a new Dairy Options

Pilot Program (DOPP) to be administered by the Risk Management Agency

(RMA) in conjunction with the private sector. The objective of DOPP is

to provide education, training and assistance to producers to ascertain

whether put options can provide producers with reasonable protection

from the price risk.

EFFECTIVE DATE: December 14, 1998.

FOR FURTHER INFORMATION CONTACT: For further information and a copy of

the cost-benefit analysis to the DOPP, contact Joe Connor, Financial

Analyst, Reinsurance Services Division, Risk Management Agency, United

States Department of Agriculture, 1400 Independence Avenue, S.W., Stop

0804, Room 6739-S, Washingon, DC., 20250-0804.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

The Office of Management and Budget (OMB) has determined this rule

to be significant for the purposes of Executive Order 12866 and,

therefore, 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 who have benefited 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.

Paperwork Reduction Act of 1995

Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. chapter

35), the collections of information for this notice have been approved

by the Office of Management and Budget (OMB) under control number 0563-

0054 through February 28, 2001.

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 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 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. 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 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 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

12988 on civil justice reform. The provisions of this notice will not

have a 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 any action for judicial

review of any determination made by RMA 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 Environmental Assessment nor an Environmental Impact

Statement is needed.

Background

Section 191 of the Federal Agriculture Improvement and Reform Act

of 1996 authorizes the Secretary of Agriculture (Secretary) 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 directed RMA to develop DOPP.

[[Page 59931]]

The purpose of this notice is to announce the implementation of

DOPP. DOPP will not be published as a proposed or final rule unless the

program is authorized to be and is offered on a wider basis. DOPP will

be in effect when applications and contracts are made available by RMA

and producers in selected counties are provided actual notice through

the mail of the program's availability.

DOPP is intended to offer an educational experience to dairy

producers whose need for risk management tools has risen sharply as a

result of 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 usefulness of

commodity futures and options markets to manage risk in the dairy

industry.

The program represents a joint initiative between RMA and the

private sector. DOPP procedures were 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

milk futures and options markets.

The program will be available in the following States and counties:

Stanislaus, Merced, Tulare, San Bernadino, San Joaquin, and Kings

counties, California; Stearns, Otter Tail, Todd, Morrison, Winona, and

Goodhue counties, Minnesota; St. Lawrence, Oneida, Steuben, Chautaugua,

Jefferson, and Lewis counties, New York; Lancaster, Bradford, Franklin,

Crawford, Berks, and Chester counties, Pennsylvania; Hopkins, Wood, Van

Zandt, Erath, Johnson, and Comanche counties, Texas; Marathon, Clark,

Grant, Vernon, and Chippewa counties, Wisconsin; and Franklin, Addison,

Orleans, Orange, Rutland, and Caledonia counties, Vermont. At the

discretion of the Secretary, States and counties are subject to change

throughout the duration of this pilot program.

The participation limit per county is set at 100 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 in the

first round of the program will obtain preference in the next round

offered in their county. 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 and sign an application (Form CCC-320) and a release of information

from their broker to RMA (CCC-321).

The program will last a maximum of 8 months for each participating

producer commencing at the date of training through the close-out of

DOPP options positions. After registration and training, producers will

have up to 2 months to purchase DOPP options and all DOPP options must

expire within 6 months from the date of purchase. Producers are

required to buy ``put options'' at least two months in the future in

order to allow time for the educational benefits of the program to be

realized. For the same reason, producers will be required to hold their

options until the four week period immediately prior to the expiration

date.

In order to introduce the new trading volume onto the markets

slowly, each round of participants will commence trading at different

times by state.

The two exchanges where the BFP futures and put options are

currently available are CSCE and 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 100,000 and 600,000 pounds of milk over a six-month period.

Producers will be required to submit documentation supporting their

farm's production of at least 100,000 pounds of milk over a six-month

period.

Discussion of Comments and Changes to the Program

On Friday, January 2, 1998, RMA published an Advance Notice of

Availability and Request for Comments in the Federal Register at 63 FR

51 to seek input from the public on a new DOPP to be administered by

the RMA in conjunction with the private sector. The public was afforded

30 days to submit written comments and opinions.

Approximately one-hundred comments were received from dairy

producers, cooperatives, industry associations, milk processors,

members of Congress, commodities exchanges, academics, state

representatives, and the general public. Over 95 percent of the

comments were in favor of the concept of the program, though many

suggested ways to improve the program's design features.

Comments received generally revolve around 4 major issues: (1) what

states and counties would be first implemented; (2) what exchange or

exchanges would be used to trade DOPP options; (3) whether cooperatives

should be able to participate as eligible producers; and (4) various

modifications to the constraints on trading behavior placed on DOPP

participants. The comments received and RMA's responses are as

follows:.

Comments: Seventy comments were solicitations by producers,

agricultural extension agents, brokers, futures exchanges, association

of dairy cooperatives, state and Federal government representatives,

and legislators to implement DOPP in their states and counties or

congressional districts. One cooperative suggested that the county

selection criteria should be: (1) the majority of farms (but not all)

should be family operations; (2) states should be representative of the

industry as a whole; (3) states should not be selected if they are

dominated by just one or two cooperatives; and (4) favor should be

given to states with strong pre-existing support structures such as

active university extension, marketing clubs, etc. An extension agent

suggested selecting states and counties from the several regions of

milk production, and makes a point of selecting one state from the west

and from the southeast.

Response: Selection of the counties where the DOPP is to be

implemented first was based on the concentration of production and the

geographical proximity of selected counties to one another. The former

criterion is relatively objective and was based on 1992 agricultural

census data. The latter criterion is more subjective but is necessary

to enable RMA to increase operational efficiency with regard to

training and compliance. The selected counties contain a diverse

mixture of family farms and corporate farms of all sizes, as well as

regions where many cooperatives are active, not just one or two

dominant cooperatives. Extension support and marketing clubs are also

found in many of these areas.

Comments: Fifty-one comments from cooperatives, futures exchanges,

legislators, association of dairy cooperatives, brokers and industry

associations suggested the use of a single exchange or a single

contract in the program. They can be summarized as follows:

(A) DOPP options should be traded solely on the Coffee Sugar &

Cocoa Exchange (CSC) because: (1) Trading on two exchanges diffuses

liquidity the program could be expected to build; (2) it makes the

program less confusing to the new trader; (3) it makes data collection

and analysis easier; (4) it recognizes CSC's longer commitment to

[[Page 59932]]

the project and innovative contribution to the program's design; and

(5) CSC has an excellent track record on aggressive efforts to present

educational seminars.

(B) DOPP options should be traded using any single contract and

exchange but not more than one of either to make the program less

complicated.

(C) DOPP options should be traded on any eligible exchange as

established by the language of the statute and the Advance Notice of

Availability and let the market decide where DOPP options should be

traded and inform the producers of the different contracts available on

the market.

Response: Dairy producers should be able to choose the options

product that best fits their needs both in terms of contract size and

in the exchange used. The market alone should dictate where options are

traded and it would be inappropriate for RMA to intervene in that

process. Further, the complexity of these markets is not something the

producer should be sheltered from under the program. Rather, the

program is intended to be an educational opportunity for the producer

to become familiar with this complexity.

Comments: Two cooperatives and one association suggested DOPP

should allow cooperatives to be DOPP participants, thus making the

program less time consuming to the producer and bringing their key

partner, the cooperative, up to speed on futures and options as well as

indirectly encouraging cooperatives to expand their forward contracting

programs.

Response: Based on the language in section 191 of the Federal

Agriculture Improvement and Reform Act of 1996 (1996 Act), there is no

authority to allow other than those producers who are eligible for a

production flexibility contract, a marketing assistance loan, or other

assistance under title I of the 1996 Act. Cooperatives are not eligible

for any of the programs listed. Therefore, no change has been made.

Comment: One exchange suggested that RMA should clarify

restrictions on the timing of purchases.

Response: RMA has clarified the provisions regarding the date by

which all purchases must be complete. RMA has also added a provision to

clarify for what months the options can be purchased.

Comment: One broker and one crop insurance company suggested that

RMA should remove the 600,000 pound maximum production that can be

hedged under the program.

Response: This program is experimental and intended to determine

the feasibility of such a risk management tool. The 600,000 pound

maximum is intended to allow sufficient use of the market while

protecting taxpayers from larger outlays than necessary to achieve the

educational objective of the program. Therefore, no change has been

made.

Comment: One association and one broker commented that RMA should

change the maximum strike price of 25 cents out-of-the-money to the

first strike price that is ``at'' or ``in'' the money.

Response: This change would also be too expensive to implement and,

potentially, less relevant educationally because producers wishing to

hedge production might be less inclined to choose an expensive ``in''

the money option. However, the 25 cent requirement has been reduced to

10 cents.

Comment: One legislator and one producer suggested that DOPP should

be implemented in the statutorily allowed 100 counties.

Response: As RMA's first options pilot program, it has been

determined that a smaller scale of operation will allow greater

opportunity to observe and make adjustments to the program before

expanding it. Further, implementing the program at its full capacity

would increase the likelihood that a proposed and final rule be

published prior to implementation, instead of a Notice of Availability.

This would eliminate RMA's ability to modify the program expeditiously

in its early stages. Therefore, no change has been made.

Comment: One broker suggested that the separate billing scheme

would detract from the realism of the producer's experience.

Response: In any subsidized program, the producer will not receive

a perfectly realistic free-market experience. By using a billing scheme

that bills RMA for the subsidized portion of the transaction, RMA has

enhanced the speed and efficiency of the payment system. A 72 hour turn

around time is required by brokers under their industry regulations.

Other alternatives such as asking producers to put up the money and be

reimbursed later, or advancing funds to the producer to conduct DOPP

trades were considered. However, the former alternative was rejected on

the grounds that it would negatively impact participation due to the

limited working capital of many small dairy producers. The latter was

deemed to subject the program to increased risk of misuse of funds

while significantly complicating the compliance audit process. Further,

timeliness of trading and compliance information will play a critical

role as RMA evaluates the program for program expansion and relocation.

Therefore, no change has been made.

Comment: One cooperative suggested that 6 months is too short a

period for the program to last for each participant and stated that 12

months is better.

Response: The program can actually last as long as 8 months from

the date of the producer's attendance at the required training class.

RMA determined that an 8 month time period encompasses enough of the

dairy marketing cycle to enable the producer to implement and complete

a useful price risk hedge and allow the producer to decide whether to

continue utilizing this risk management strategy. Therefore, no change

has been made.

Comment: One state government employee commented that RMA should

clarify that producers cannot buy options on more milk than they

produce over six months.

Response: RMA has added a provision that specifies that producers

cannot purchase put options for more production than the producer has

documents to prove was produced during the 6 month period.

Comment: Two brokers suggested that RMA should clarify the flow of

funds.

Response: RMA has clarified that RMA and the producer will make

their respective required payments directly to the broker.

Comment: One broker suggested that funds should be committed to

subsidize additional floor brokers (market makers) to ensure continued

viability of the program.

Response: New floor brokers should naturally gravitate toward the

BFP contracts in response to the new volume the program will provide.

Therefore, no change has been made.

Comment: One association of dairy cooperatives suggested that DOPP

should be funded for three years to allow a diverse group of producers

to participate.

Response: RMA has received funding approval to operate the program

for three years.

Comment: One association suggested that the requirement that

producers cannot exercise or sell an option until the four weeks prior

to expiration should be eliminated or modified.

Response: Previous options pilot programs administered by USDA were

criticized for failing to educate producers by permitting them to sell

their options the same day they obtained them. In order to maximize the

educational experience in hedging strategies, the producer should hold

a position until the month they are actually hedging. To allow the sale

of the option before that time may re-expose the producer to price risk

for the rest of time before the expiration date.

[[Page 59933]]

RMA will take this into consideration as it conducts its ongoing

evaluation of the program and make such changes as are necessary.

Therefore, no change has been made.

Comment: One association suggested that RMA should clarify the

reporting requirement for participation.

Response: The only reporting requirements for eligibility is that

producers must report their milk production history for 6 months to

establish that they meet the 100,000 pounds of production during a

consecutive 6 month period within the previous 12 month period and

maintaining the record of each transaction to ensure that the maximum

amount of production for which options may be purchased under the

program is not exceeded. These requirements are clearly stated.

Therefore, no change has been made.

Comment: One producer perceived the program as Federally sponsored

gambling and suggested the program be abolished prior to

implementation.

Response: Futures and options contracts are widely recognized risk

management tools. The intent of DOPP is simply to educate producers on

the use of these tools. While there is some risk involved, the value of

these risk management tools, which after DOPP expires is at no cost to

the taxpayers, outweighs the risks. Therefore, no change has been made.

In addition to the changes described above, and minor reformatting

and word changes for clarity, RMA has made the following changes to

DOPP:

1. In section 1 of the producer contract, RMA added definitions of

``hedge,'' ``round turn,'' ``Secretary,'' ``strike month,'' and

``USDA'' for clarification.

2. In section 2(a)(4) of the producer contract, RMA reduced the

minimum production in a consecutive 6 month period to be eligible for

the program from 200,000 pounds to 100,000. This change will ensure

that smaller producers are not excluded from the program.

3. In section 2 of the producer contract, RMA added a provision

that requires the producer to execute the DOPP contract and comply with

all its terms and conditions in order to permit enforcement of program

requirements.

4. In section 3(a)(2) of the producer contract and broker

agreement, RMA reduced the amount of milk upon which producers must

purchase put options from 200,000 pounds to 100,000 to allow smaller

producers to participate. RMA also added a provision that specifically

states that options on no more than 600,000 pounds of milk production

can be purchased by any producer. This requirement is intended to limit

the potential costs of the program until such a time that its viability

can be assessed.

5. In section 3 of the producer contract and broker agreement, RMA

clarified when put options may be sold or exercised and has included an

example.

6. In section 3(b) of the producer contract, RMA added a provision

requiring the producer to submit the application to RMA within 30 days

after receiving notification and application materials from RMA through

the mail so that RMA can timely select producers to participate in the

program and reallocate any unfilled slots.

7. In section 5(a) of the producer contract, RMA reduced the number

of producers allowed to participate in each county from 150 to 100.

This change was based on information indicating that it is unlikely

that any county will have more than 100 producers interested in

participating. A reduction in the number of participants per county

will also allow RMA to increase the number of states participating from

6 to 7, which will allow for a greater geographic representation of

milk producers in the program without increasing budget outlays.

8. In section 5(d) of the producer contract and broker agreement,

RMA deleted the requirement that no put option could be purchased at a

premium that was more than 160 percent of the previous day's settlement

premium because such limits could routinely be exceeded under normal

trading situations.

9. In section 6(d) of the producer contract, RMA added a new

provision that authorized the Chicago Mercantile Exchange and Coffee,

Sugar, and Cocoa Exchange to replace BFP options contracts with options

contracts based on a milk price index other than the BFP in order to

provide greater flexibility into the program. This change is necessary

because USDA may stop publishing the BFP at some point in the future.

10. In section 1 of the broker agreement, RMA added definitions of

``hedge,'' ``Secretary,'' ``strike month,'' and ``USDA'' for

clarification.

11. In section 2 of the broker agreement, RMA added provisions that

require the broker to attend at least one DOPP training session and

have specified hardware and software to electronically receive and

transmit data to RMA to be eligible to participate.

12. In section 3 of the broker agreement, RMA added provisions

specifying that brokers cannot allow producers to purchase a DOPP

option that expires during a month that is more than 6 months after the

month of purchase for that option in order to protect the integrity of

the program.

13. In section 3 of the broker agreement, RMA also added a

provision specifying the applicable sanctions if the broker fails to

comply with the terms and conditions of the broker agreement.

14. In section 3 of the broker agreement, RMA deleted the provision

mandating that brokers cannot accept an application unless the

producer's marketing receipts show the requisite production since RMA

will be accepting the applications.

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

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 (BFP). The price established by USDA, and

provided to the USDA marketing order administrators to be used to

set regional minimum prices.

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.

DOPP. Dairy Options Pilot Program.

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.

Hedge. To take compensatory measures to counter a possible loss.

Open outcry. Method of public auction required to make bids and

offers in the trading pits, or rings, of commodity exchanges.

[[Page 59934]]

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.

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.

Secretary. The Secretary of Agriculture.

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 month. The month preceding the month in which a DOPP

options contract expires, e.g., the strike month for a DOPP option

contract that expires in March would be February.

Strike price. The price at which the holder of a put option may

sell the underlying futures contract.

USDA. The United States Department of Agriculture.

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 title I of

the Federal Agriculture 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

(4) Have documented production history of at least 100,000

pounds of production over any consecutive six month period during

the most recent 12 months.

(b) This program is available to producers in states and

counties designated.

(c) Execute this contract and comply with its terms and

conditions.

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 use of put options and the

program's operations;

(2) To buy all put options on a minimum of 100,000, and a

maximum of 600,000, pounds of milk on an eligible market, through an

eligible broker, within 2 months after the date the producer attends

the required training session;

(3) That put options on no more than 200,000 pounds of milk will

be purchased for any one strike month under this program;

(4) That put options on no more than the producer's total

average production over the 6-month period used to establish the

producer's eligibility shall be purchased under this program (For

example, if a producer has provided copies of marketing receipts for

245,000 pounds of milk production eligible for the program, only

200,000 pounds can be hedged under the program because there are no

45,000 pound contracts or less currently available on the market);

(5) That the producer shall not purchase a DOPP option that

expires on a date that is less than 2 months after the date the DOPP

option was purchased (For example, assume the producer wants to

hedge August 1998 production with BFP put options. The last date on

which he or she shall be able to purchase an August option is

Friday, July 3, because the August options expire exactly two months

later, September 3. On July 4, the earliest option the producer

could purchase is the September contract);

(6) That the put options will be purchased at a strike price

that is at least 10 cents out of the money;

(7) That no put options will be sold or exercised before four

weeks prior to the expiration date (For example, the BFP is

announced by the USDA on the fifth of the month following the strike

month, which is not on a weekend or Federal holiday. The September

BFP will be announced by USDA on Monday, October 5, 1998. The

September BFP option expires on the last day of trading of the

September BFP futures contract, which is the day before the date of

the BFP's announcement, or in this case, October 2, 1998 (October 4

is a Sunday). For purposes of DOPP, the four week period leading up

to October 2, 1998, will begin on September 4, 1998. Therefore, a

DOPP participant holding a September BFP put option would be free to

sell or exercise that option at his or her discretion between

September 4, 1998, and the expiration date. If the producer

exercises the put option and holds the futures contract, the

producer assumes the risk of any loss); and

(8) That all options purchased shall expire during the month

that is not more than 6 months after the month of purchase. For

example, assume a producer is trained on June 4, 1998, and makes all

purchases in the months of June and July. The latest option contract

the producer is permitted to buy is the December 1998 contract,

which expires in January, 1999.

(b) The producer must open an account with an eligible broker in

order to participate in the program and must do so before making any

purchases.

(c) The producer must submit a properly completed and executed

application and a copy of the marketing receipts for 6 consecutive

months in the previous 12 months showing production in excess of

100,000 pounds to RMA within 14 days after receiving notification

and application materials from RMA through the mail.

4. Costs.

(a) The producer will pay 20 percent of the premium of each put

option to the broker.

(b) RMA shall pay transactions costs not to exceed $30 per round

turn and 80 percent of the premium to the broker on behalf of the

producer. The producer is free to deal with brokers who charge more

than $30 per round turn, but the producer will be responsible for

any amount that exceeds $30.

5. Restrictions and limitations.

(a) Except as stated herein, total program participation will be

limited to 100 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 100

participants are enrolled in a county, the number of unfilled

participation slots will be pooled and redistributed over counties

where enrollment exceeds 100.

(b) The producer will be able to order put options from a broker

after the broker has obtained verification from RMA of the

producer's selection as a program participant and the date the

producer received training. Verification will take place

electronically after the producer selects an eligible broker.

(c) No producer may participate in the program more than once.

(d) 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 and broker fees paid by RMA on

behalf of the producer.

(e) This agreement is not effective until the producer executes

and returns forms CCC-320, with supporting documentation of milk

marketing, and CCC-321, and the producer receives written notice

from RMA that the producer has been accepted into the program.

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.

(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 tax advisor.

(d) The CME or the CSCE could replace BFP options contracts with

options contracts on another milk price index. The program will

permit the trading of options contracts on another milk price index

selected by the CME or the CSCE.

Notice: The terms and conditions for the DOPP broker agreement

are as follows:

[[Page 59935]]

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 USDA, and provided

to USDA's marketing order administrators to be used to set regional

minimum prices.

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.

DOPP. Dairy Options Pilot Program.

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.

Hedge. To take compensatory measures to counter a possible loss.

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, landlord, tenant, or sharecropper, is entitled to share in

the production available for marketing from the dairy 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.

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.

Secretary. The Secretary of Agriculture.

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 month. The month preceding the month in which a DOPP

options contract expires, e.g., the strike month for a DOPP options

contract that expires in March would be February.

Strike Price. The price at which the holders of a put option may

choose to sell the underlying futures contract.

USDA. The United States Department of Agriculture.

2. Eligibility.

(a) To be eligible to 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;

(3) Attend at least one DOPP training session;

(4) Have the following hardware and software and service in

order to operate the DOPP communications software: Internet Service

Provider; Internet E-mail address; a Windows 95 PC; Internet

Browser, either Microsoft Internet Explorer or Netscape; minimum

28.8 modem; minimum 8 meg RAM, (16 meg recommended); and

(5) 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 all put options on a minimum of 100,000 and a maximum

of 600,000, pounds of milk on an eligible market within 2 months

after the date the producer attends the required training session;

(2) That put options on no more than 200,000 pounds of milk will

be purchased for any one strike month under this program;

(3) That put options on no more than the producer's total

production over the 6-month period used to establish the producer's

eligibility of production shall be purchased under this program;

(4) That the producer shall not purchase a DOPP option that

expires on a date that is less 2 months after the date the DOPP

options contract was purchased (For example, assume the producer

wants to hedge August 1998 production. The last date on which he or

she shall be able to purchase an August option is Friday, July 3,

because the August options expire exactly two months later,

September 3. After July 3, the earliest option the producer could

purchase is the September contract);

(5) That the put options will be purchased at a strike price

that is at least 10 cents out of the money;

(6) That no put options will be sold or exercised before four

weeks prior to the expiration date (For example, the BFP is

announced by the USDA on the fifth of the month following the strike

month, which is not on a weekend or Federal holiday. The September

BFP will be announced by USDA on Monday, October 5, 1998. The

September BFP option expires on the last day of trading of the

September BFP futures contract which is the day before the date of

the BFP's announcement, or in this case, October 2, 1998 (October 4

is a Sunday). For purposes of DOPP, the four week period leading up

to October 2, 1998, will begin on September 4, 1998. Therefore, a

DOPP participant holding a September BFP put option would be free to

sell or exercise that option at his or her discretion between

September 4, 1998, and the expiration date. If the producer

exercises the put option and holds the futures contract, the

producer assumes the risk of any loss); and

(7) That all options purchased shall expire during the month

that is not more than 6 months after the month of purchase (For

example, assume a producer is trained on June 4, 1998, and makes all

purchases in the months of June and July. The latest option contract

the producer is permitted to buy is the December 1998 contract,

which expires in January, 1999).

(b) The broker must keep detailed records on each transaction

and transmit that information to RMA through electronic data

transmission. The broker will be provided with communications

software for this purpose by RMA. Records required include:

(1) The purchase date, time, and premium for each put option;

(2) The expiration date and strike month for each put option;

and

(3) 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 and the time of the transaction.

(c) Brokers certify that systems used to transmit data will be

year 2000 compliant, i.e., be able to accurately process date and

time data (including, but not limited to, calculating, comparing,

and sequencing) from, into, and between the years 1999 and 2000 and

leap year calculations, and to properly exchange date and time data

with other information technology. Data transmission requirements

and year 2000 compliance guidelines are available upon request.

(d) The broker cannot permit a producer to purchase a DOPP

option until RMA has electronically notified the broker that the

producer has been accepted into the program, the amount of milk for

which the producer has provided production records, and the date on

which the producer fulfilled the training requirements.

(e) 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 broker fees and

premiums paid by RMA on options contracts traded by the broker under

the program.

4. Costs.

(a) Up to $30 per round turn in broker fees will be paid by 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 transaction costs not to exceed $30 and

the balance of the premium, 80 percent, to RMA. RMA will pay these

amounts via the automated clearing

[[Page 59936]]

house (ACH) payments process within three banking days after RMA's

acceptance of the transaction. Transactions will be considered

accepted after RMA systems verify that the broker and participant

have been selected for participation in the program, and that the

transaction does not violate the trading limitations of the program

itemized in Section 3 above.

5. Program changes.

(a) The broker acknowledges that, due to the pilot nature of

this program, on-going modifications may be necessary. The broker

agrees to abide by reasonable changes in the program by RMA.

(b) The CME or the CSCE could replace BFP options contracts with

options contracts on another milk price index. The program will

permit the trading of options contracts on a new milk price index

selected by the futures exchanges at that time.

Signed in Washington, D.C., on November 2, 1998.

Kenneth D. Ackerman,

Administrator, Risk Management Agency.

[FR Doc.98-29724 Filed 11-5-98; 8:45 am]

BILLING CODE 3410-08-P