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Cialis refractory GILTNER, cialis refractory Neb.—Farmer Jim Kreutz uses derivatives to soften the blow should the price of feed corn drop before harvest. Cialis refractory His brother-in-law, cialis refractory feedlot owner Jon Reeson, cialis refractory turns to them to hedge the price of his steer. Cialis refractory The local farmers’ co-op uses derivatives to finance fixed-price diesel for truckers who carry cattle to slaughter. Cialis refractory And the packing plant employs derivatives to stabilize costs from natural gas to foreign currencies.

Cialis refractory Far from Wall Street, cialis refractory President Barack Obama’s financial regulatory overhaul, cialis refractory which may pass Congress as early as Thursday, cialis refractory will leave tracks across the wide-open landscape of American industry.

Cialis refractory Designed to fix problems that helped cause the financial crisis, cialis refractory the bill will touch storefront check cashiers, cialis refractory city governments, cialis refractory small manufacturers, cialis refractory home buyers and credit bureaus, cialis refractory attesting to the sweeping nature of the legislation, cialis refractory the broadest revamp of finance rules since the 1930s.

Cialis refractory Here in Nebraska farm country, cialis refractory those in the business of bringing beef from hoof to mouth are anxious, cialis refractory specifically about the bill’s provisions that tighten rules governing derivatives. Cialis refractory Some worry the coming curbs will make it riskier and pricier to do business. Cialis refractory Others hope the changes bring competition that will redound to their benefit.

Cialis refractory “Out here we like to cuss the large banking institutions because of the mortgage mess, cialis refractory but we also know that without them some of these markets don’t work, cialis refractory” says Mike Hoelscher, cialis refractory energy program manager for AgWest Commodities LLC, cialis refractory a Holdrege, cialis refractory Neb., cialis refractory brokerage that provides derivatives services to the farming industry.

How Farmers Use Derivatives


Cialis refractory Derivatives are financial instruments whose value “derives” from something else, cialis refractory such as interest rates or heating-oil prices. Cialis refractory The first derivatives were crop futures, cialis refractory which appeared in the U.S. Cialis refractory at the end of the Civil War and became a standard facet of business for companies across America.

Cialis refractory During the financial crisis, cialis refractory they became notorious as American International Group Inc. Cialis refractory and others were gutted by bad bets on derivatives linked to bad mortgages.

Cialis refractory President Obama and other proponents say the financial overhaul will prevent the kind of reckless lending and borrowing that sank the financial system and left taxpayers with the check. Cialis refractory They say non-financial companies are worrying unduly about the derivatives portion of the legislation. Cialis refractory The Senate is expected to approve the financial regulatory overhaul on Thursday, cialis refractory sending it to the president.

Cialis refractory The full impact won’t be known for years, cialis refractory but in Nebraska nerves are already on edge.

Cialis refractory Executives at Five Points Bank in Hastings think the new rules on mortgage lending will make the home-loan business less profitable. Cialis refractory “When they create a new regulator, cialis refractory it really scares us, cialis refractory” says Nate Gengenbach, cialis refractory vice president of commercial and agricultural lending.

Cialis refractory Advance America Cash Advance Centers Inc. Cialis refractory thinks the new Bureau of Consumer Financial Protection will take aim at the payday-loan business, cialis refractory though it’s not clear what steps the agency will take. Cialis refractory Advance America’s storefront at the Skagway Mall in Grand Island charges an effective 460.08% annualized interest rate on a two-week $425 loan.

Cialis refractory But it’s the derivatives portion—the part of the bill aimed directly at Wall Street—that might end up touching most lives in rural America.

Cialis refractory The new law requires most derivatives transactions be standardized, cialis refractory traded on exchanges, cialis refractory just like corporate stocks, cialis refractory and funneled through clearinghouses to protect against default.

What’s Made It Into the Bill?

Cialis refractory For consumers, cialis refractory for investors, cialis refractory for banks and for the government.

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Overhaul Timeline

Cialis refractory See a timeline of the legislation’s progress.

Cialis refractory

Akaka to Wyden

Cialis refractory Review the senators’ current vote plans.

Cialis refractory Faced with intense lobbying, cialis refractory Congress partially exempted businesses that use derivatives for commercial purposes. Cialis refractory So, cialis refractory farmers and co-ops probably won’t face new collateral requirements, cialis refractory for instance—although there remains a dispute over that section of the bill. Cialis refractory Those that trade derivatives on regulated exchanges, cialis refractory such as the Chicago Board of Trade, cialis refractory are less likely to see immediate impacts than those conducting private over-the-counter deals, cialis refractory which will face federal regulation for the first time. Cialis refractory The goal is to make such deals transparent.

Cialis refractory The question for these farmers is whether such rules will make hedging more expensive. Cialis refractory Some say new requirements on big players will create higher costs for small players, cialis refractory including the cash dealers will have to put aside to enter into private derivatives transactions. Cialis refractory Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.

Cialis refractory Others predict the opposite effect, cialis refractory pushing money from the private market to the exchanges and creating more competition that will benefit farmers.

Cialis refractory Uncertainty reigns in Giltner, cialis refractory a town of 400 residents 80 miles west of Lincoln. Cialis refractory At first glimpse, cialis refractory Giltner’s landscape seems featureless, cialis refractory a fading horizon of corn and soybeans. Cialis refractory But its details are more subtle, cialis refractory including wildflowers and shaded creeks. Cialis refractory Everywhere galvanized-steel sprinkler systems crawl across farm fields like giant stick insects.

Cialis refractory Mr. Cialis refractory Kreutz, cialis refractory an outgoing 36-year-old with a sandy crewcut and sunburned neck, cialis refractory gave up a career in finance and took over the 2, cialis refractory800-acre family farm after his father’s death. Cialis refractory As he works his fields, cialis refractory he checks the crop futures prices on his smart phone.

Cialis refractory Here’s how Mr. Cialis refractory Kreutz does it: Say in early summer he sees that the price for a Chicago Board of Trade futures contract on corn for delivery later in the year is $3.56 a bushel. Cialis refractory If he likes the price, cialis refractory and wants to lock it in, cialis refractory he calls AgWest and sells a futures contract for 5, cialis refractory000 bushels. Cialis refractory The futures contract is a derivative in which the price for corn is set now for exchange in the future, cialis refractory though no kernels will change hands. Cialis refractory Instead, cialis refractory when the contract nears expiration, cialis refractory Mr. Cialis refractory Kreutz and the buyer of his contract will settle—in effect—by check.


Cialis refractory By fall, cialis refractory when Mr. Cialis refractory Kreutz is ready to deliver his crop to the local co-op, cialis refractory the market price might have fallen by 50 cents. Cialis refractory He’ll sell his actual corn for that lower amount. Cialis refractory But he’ll make up the difference through his financial hedge. Cialis refractory (Mr. Cialis refractory Kreutz buys a new futures contract at the lower price to make good on his earlier promise, cialis refractory making up the 50 cents.) In all, cialis refractory he’ll have hit the price target he locked in earlier in the year, cialis refractory minus brokerage fees.

Cialis refractory If the price rises during the summer, cialis refractory as it did during the food crisis two years ago, cialis refractory Mr. Cialis refractory Kreutz has to pony up extra cash for his broker—a margin call—to maintain his positions. Cialis refractory He recoups that by selling his actual corn at a higher price, cialis refractory but has to take a loss to meet the futures contract he signed earlier in the year, cialis refractory missing out on a windfall but ultimately meeting his target price.

Cialis refractory Mr. Cialis refractory Kreutz does this type of operation dozens of times a year, cialis refractory hedging about 70% of his 345, cialis refractory000-bushel corn harvest.

Cialis refractory Such deals ripple through the local economy. Cialis refractory When Mr. Cialis refractory Kreutz gets a margin call from his broker, cialis refractory he turns to his banker, cialis refractory Mr. Cialis refractory Gengenbach, cialis refractory for a loan to cover it. Cialis refractory Mr. Cialis refractory Gengenbach estimates that one quarter of his farm clients use derivatives.

Cialis refractory “Somebody like Jim has a lot of money in his crop out here, cialis refractory” says the 37-year-old Mr. Cialis refractory Gengenbach. Cialis refractory “If he can’t protect that, cialis refractory it’s not good for us.”

Cialis refractory Mr. Cialis refractory Kreutz’s brokerage, cialis refractory AgWest, cialis refractory thinks the new finance law will hurt both firm and farm. Cialis refractory If big investors and dealers have to keep more cash on hand, cialis refractory there will be less liquidity in the market and therefore the cost of derivatives will increase, cialis refractory Mr. Cialis refractory Hoelscher, cialis refractory the broker said.

Cialis refractory A few minutes from the Kreutz family farm are the corrals of Jon Reeson’s feedlot. Cialis refractory Mr. Cialis refractory Reeson, cialis refractory 43, cialis refractory is married to Mr. Cialis refractory Kreutz’s sister Jane. Cialis refractory His feedlot holds as many as 1, cialis refractory500 steer, cialis refractory mostly Black Angus, cialis refractory which grow from 600-lb. Cialis refractory calves into 1, cialis refractory300 pounders ready for slaughter.

Cialis refractory Mr. Cialis refractory Reeson uses derivatives to hedge both the price he pays for feed and the price he gets for selling his steer.


Cialis refractory The fattening takes about 7, cialis refractory000 pounds of food for each animal. Cialis refractory Mr. Cialis refractory Reeson can’t count on a favorable price from his brother-in-law’s farm, cialis refractory in which he has a stake, cialis refractory so when he sees a feed price he likes, cialis refractory he seals it with a futures contract.

Cialis refractory In April, cialis refractory he called AgWest and locked in a price with a futures contract for $95 per hundredweight of cattle. Cialis refractory Since then the market price has dropped to $90. Cialis refractory If the price stays there until October, cialis refractory he’ll have made the right call, cialis refractory earning a higher price than if he’d relied on the market alone. Cialis refractory If the price spikes higher, cialis refractory though, cialis refractory he’ll miss out on potential gains.

Cialis refractory Mr. Cialis refractory Reeson is willing to live with that possibility in exchange for locking in a profit or a narrowed loss. Cialis refractory Derivatives hedging helped him survive the recession of 2008-2009, cialis refractory when cash-strapped diners avoided steak and the price of beef plunged.

Cialis refractory He’s watching the new legislation warily and can’t yet tell if it will hurt or help.

Cialis refractory When his cattle have reached full weight, cialis refractory Mr. Cialis refractory Reeson puts them on Roger and Barb Wilson’s trucks for the trip to the slaughterhouse. Cialis refractory The Wilsons have seven semi tractors and 16 trailers, cialis refractory and one of their biggest costs is diesel fuel to keep the fleet on the road.

Cialis refractory In 2004, cialis refractory Cooperative Producers Inc., cialis refractory his local co-op, cialis refractory offered Mr. Cialis refractory Wilson a price-protection plan for 10, cialis refractory000 gallons of diesel at about $2.50 a gallon, cialis refractory with 90 days to use it.

Cialis refractory CPI had a choice. Cialis refractory It could take its chances and hope the price of fuel would drop before Mr. Cialis refractory Wilson took delivery on his full order, cialis refractory a windfall for the co-op. Cialis refractory If diesel prices jumped, cialis refractory though, cialis refractory the coop would take a bath. Cialis refractory “That falls under speculation, cialis refractory” says Gary Brandt, cialis refractory CPI’s vice president of energy. Cialis refractory “But that’s not what cooperatives do. Cialis refractory That’s what Goldman Sachs does.”

Cialis refractory Instead, cialis refractory CPI hedged on the New York Mercantile Exchange, cialis refractory buying a futures contract on heating oil, cialis refractory a close market substitute for diesel fuel. Cialis refractory The co-op goes a step further and hedges also the difference between the prices of fuel traded in New York and delivered in Nebraska.

Cialis refractory For the 57-year-old Mr. Cialis refractory Wilson, cialis refractory the pricing plan proved a mixed blessing. Cialis refractory The first year, cialis refractory the pump price shot up by another 20 to 25 cents, cialis refractory meaning he was getting a good deal. Cialis refractory The following year the pump price dropped about a quarter a gallon, cialis refractory but Mr. Cialis refractory Wilson was obliged to pay the higher price. Cialis refractory “It hurt to have to pay for that fuel, cialis refractory” he recalls sourly. Cialis refractory He quit the program after that.

Cialis refractory The finance law’s imminence has prompted CPI’s Mr. Cialis refractory Brandt to warn his sales team and customers that the co-op may have to end its maximum-price fuel contracts. Cialis refractory He’s worried too that CPI might have to cut its fuel supplies if it can’t hedge against price drops.

Cialis refractory “We have to start making a game plan if they take away the ability for us to hedge that inventory, cialis refractory” Mr. Cialis refractory Brandt says.

Cialis refractory The Wilsons deliver Mr. Cialis refractory Reeson’s steer to a low, cialis refractory cement-gray complex on the edge of Grand Island, cialis refractory Neb., cialis refractory where trucks arrive loaded with cattle, cialis refractory and others leave loaded with meat. Cialis refractory Over the past year, cialis refractory Mr. Cialis refractory Reeson has sold 1, cialis refractory125 steer to the packing plant, cialis refractory which is owned by JBS USA, cialis refractory a Greeley, cialis refractory Colo., cialis refractory unit of Brazilian-owned JBS SA.

Cialis refractory JBS buys livestock two ways. Cialis refractory Sometimes it pays cash for the following week’s kill. Cialis refractory Sometimes it buys further forward, cialis refractory agreeing in July, cialis refractory for instance, cialis refractory to a fixed price for steer delivered in December. Cialis refractory JBS hedges on the derivatives market to make sure live cattle prices don’t drop before it takes delivery.


Michael M. Cialis refractory Phillips/The Wall Street JournalBlack Angus cattle at Jon Reeson's feedlot in Giltner, cialis refractory Neb.

Cialis refractory The company also sells beef cuts forward to restaurant chains, cialis refractory promising delivery at set prices months ahead of time. Cialis refractory JBS expects to have enough meat to fulfill the agreements. Cialis refractory But if it runs short, cialis refractory it doesn’t want to risk having to pay higher prices to buy meat to supply those restaurants.

Cialis refractory So, cialis refractory it uses the derivatives market to play it safe. Cialis refractory To do so, cialis refractory the company has to find a way to hedge different cuts of beef: Tenderloins might represent 1.5% of the total value of a steer. Cialis refractory Strip loins might make up 3%. Cialis refractory In a sense, cialis refractory JBS protects itself by reconstructing the steer through a derivatives trade on the Chicago Mercantile Exchange. Cialis refractory “We try to put the carcass back together financially, cialis refractory” says company spokesman Chandler Keys.

Cialis refractory The company hedges electricity for its refrigerators and natural gas for its boilers. Cialis refractory It hedges currencies to stabilize its income from overseas. Cialis refractory It hedges fuel for its fleet of thousands of trucks.

Cialis refractory Even executives at a big firm such as JBS haven’t been able to nail down the precise impact of the legislation on their business, cialis refractory introducing an unaccustomed level of uncertainty into their operations. Cialis refractory They aren’t changing the way they use derivatives, cialis refractory yet, cialis refractory hoping instead that exemptions for commercial users will insulate them.

Cialis refractory “To get food, cialis refractory particularly highly perishable food like meat and poultry, cialis refractory through to the consumer, cialis refractory you have to manage your risk, cialis refractory” says Mr. Cialis refractory Keys.

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Cialis refractory Write to Michael M. Cialis refractory Phillips at — Sarah N. Cialis refractory Lynch contributed to this article.

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