Agricultural trade options may not be necessary, but if they are to be part of a farmer's risk management portfolio, less regulation definitely is needed, witnesses at a recent Senate hearing said.  Cargill, Inc., says it won't participate in options unless the regulations are modified "substantially."  Brokers question the need but say if they are to be offered, there are risks that must be addressed.

Trade options may not help every farming operation, says Cargill, but they are "an important risk management product that will help American agriculture become a more efficient and more profitable enterprise" if the rules "are modified substantially."

The company "does not intend to participate" in the pilot program without "substantial regulatory reduction."  And Cargill doesn't think it's acting alone.  "We believe that most other companies involved in cash agricultural commodity markets will reach a similar conclusion."

If the rules were improved, "we believe these merchants would both participate in the program and introduce new risk management products that are currently unavailable to farmers."  The industry "wants and needs a pilot program that fosters rather than limits the use of agriculture trade options," Cargill adds.

Cargill has recommended that the Commodity Futures Trading Commission change the trade options pilot program in six areas:

 --Agriculture trade options merchants should be required to notify CFTC if they intend to participate in the pilot program;

 --Producers should be allowed to write covered calls, provided that strict disclosure requirements are included to "clearly
convey potential risks";

 --Arbitration rights for all trade option participants should be maintained;

 --A one-time cash settlement or "walk away" provision for each trade option sold should be allowed;

 --The net worth requirement for exemption from regulation should be reduced from $10 million to $1 million, and the possibility be explored to remove the exemption for the taker of the option;

 --CFTC should "carefully monitor the progress" of the pilot program and "take whatever steps necessary to encourage participation while maintaining minimal but necessary regulatory requirements.

"The ultimate goal of allowing the use of trade options is to provide farmers with more local marketing tools," says Scott W. Stewart of the National Introducing Brokers Association.  "It is a noble cause, but is it necessary?"

He adds, "Over the years, government programs have reduced the need for farmers to use or even learn about marketing tools.  Money they received from the government made it unnecessary.  Just within the last year, farmers are starting to realize that the time has come for them to learn how to use futures and options as well as the tools that are currently available at their elevators."

Stewart points out, however, that many elevators are using trade futures and options illegally.  "On a daily basis, members of the IB (introducing brokers) community hear from customers and prospects that are currently trading futures and options through their local elevators.  In many instances, these trades are not connected to any form of cash contract.  The producer has not opened a commodity account and has never filled out the necessary paperwork for a commodity account...the elevator is breaking numerous regulations and reaping a handsome profit in doing so."

The grain trade industry "will not promote trade options unless the CFTC makes them available with little or no regulation," Stewart continues.  "Any level of regulation and oversight that the CFTC imposes will ensure that the grain trade industry does not use these tools.  The grain trade industry does not want the CFTC to be able to audit them; they do not want the CFTC to be able to review what they are currently doing, and they especially do not want the CFTC to know what they have done in the past."

In NIBA's view, regulation and oversight of trade options "is absolutely necessary," he says. Regulation and oversight of trade options used by the grain trade industry "should be no less stringent than the regulation and oversight of futures and options used by introducing brokers, commodity trading advisors and futures commission merchants."