[Federal Register Volume 65, Number 37 (Thursday, February 24, 2000)]
[Notices]
[Pages 9237-9242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4376]


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 Notices
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains documents other than rules 
 or proposed rules that are applicable to the public. Notices of hearings 
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 delegations of authority, filing of petitions and applications and agency 
 statements of organization and functions are examples of documents 
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  Federal Register / Vol. 65, No. 37 / Thursday, February 24, 2000 / 
Notices  

[[Page 9237]]



DEPARTMENT OF AGRICULTURE

Risk Management Agency

RIN 0563-AB77


Dairy Options Pilot Program

AGENCY: Risk Management Agency, USDA.

ACTION: Notice of availability.

-----------------------------------------------------------------------

SUMMARY: This notice supersedes the Notice of Availability published on 
November 6, 1998 (63FR 59930-59936), which announced 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. 
This notice extends the program to new states and counties and changes 
several of its provisions to enhance the educational benefits of the 
program to producers. The objective of DOPP is to ascertain whether put 
options can provide dairy producers with an effective risk management 
tool by providing reasonable protection from volatile dairy prices.

EFFECTIVE DATE: February 23, 2000.

FOR FURTHER INFORMATION CONTACT: For further information contact Craig 
Witt, Director, Risk Management Education Division, Risk Management 
Agency, United States Department of Agriculture, 1400 Independence 
Avenue, S.W., Stop 0805, Room 6749-S, Washington, DC 20250-0805.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    The Office of Management and Budget (OMB) has determined this 
notice to be significant for the purposes of Executive Order 12866 and, 
therefore, has been reviewed by OMB.

Civil Rights Impact Analysis

    RMA does not collect civil rights data on the farmers/ranchers who 
participate in the programs, therefore, we cannot determine if this 
pilot program will negatively or disproportionately affect minorities, 
women or persons with disabilities who are program beneficiaries or 
applicants for program benefits in RMA assisted programs. If DOPP 
becomes a permanent program, a proposed and final rule with a complete 
civil rights impact analysis will be submitted. For specific 
information on the Civil Rights Impact Analysis, contact William 
Buchanan, Director, USDA/RMA, Office of Civil Rights, Room 3059, South 
Building, Washington, D.C. 20250-0801, telephone (202) 690-6068, e-mail 
[email protected].

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 option premiums 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 benefitted from the 
educational aspects 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 goal of supporting 
market oriented reforms in the agricultural sector.

Paperwork Reduction Act of 1995

    In accordance with section 3507(j) of the Paperwork Reduction Act 
of 1995 (44 U.S. C. 3501 et seq.), the information collection and 
recordkeeping requirements included in this notice of availability have 
been submitted for emergency approval to the Office of Management and 
Budget (OMB). OMB has assigned control number 0563-0058 to the 
information collection and recordkeeping requirements. Notwithstanding 
any other provision of the law, no person is required to respond to, 
nor shall any person be subject to a penalty for failure to comply with 
a collection of information, subject to the requirements of the 
Paperwork Reduction Act, unless that collection of information displays 
a currently valid OMB Control Number. Please send written comments to 
the Office of Information and Regulatory Affairs, OMB, Attention: Desk 
Officer for RMA, Washington, DC 20503. Please state that your comments 
refer to the Dairy Options Pilot Program (DOPP), Round 2.
    The paperwork associated with the Dairy Options Pilot Program will 
include information to be used by RMA in: (a) establishing producer 
eligibility by requiring their certification and documentation of the 
minimum level of milk production; (b) verifying compliance of 
participating producers and brokers, and (c) evaluating the 
effectiveness of dairy put options as a risk management tool for dairy 
farmers. In addition, the response to voluntary surveys will allow RMA 
to obtain the participants' perspective on the program, and valuable 
information from producers who attended information presentations but 
elected not to participate as to why the program did not fit their 
needs. We are soliciting comments from the public (as well as affected 
agencies) concerning the program's information collection and 
recordkeeping requirements. We need this outside input to help us 
accomplish the following:
    (1) Evaluate whether the collection of information is necessary for 
the proper performance of our agency's functions, including whether the 
information will have practical utility;
    (2) Evaluate the accuracy of our estimate of the burden of the 
collection of information, including the validity of the methodology 
and assumptions used;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the information collection on those who 
are to respond (such as through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., permitting electronic 
submission responses).
    Estimate of burden: 31,701 hours.
    Respondents: 6,150.
    Estimated number of responses: 42,825.
    Estimated number of responses per respondent: 1.1.
    Estimated total annual burden on respondents: $285,607.76.

[[Page 9238]]

    Copies of this information collection can be obtained from: 
Information Collection Clearance Officer, OCIO, USDA, Stop 7602, 1400 
Independence Avenue SW, Washington, DC 20250.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), 
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 13132

    It has been determined under section 1(a) of Executive Order 13132, 
Federalism, that this rule does not have sufficient implications to 
warrant consultation with the states. The provisions contained in this 
rule will not have a substantial direct effect on States, or on the 
relationship between the national government and the States, 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 not 
preempt State and local laws. 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.
    The purpose of this notice is to announce the availability of DOPP 
in new States and counties and provide the new terms and conditions of 
the program.
    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.
    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), now the New York Board of Trade 
(NYBOT). 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.
    In the November 6, 1998, Notice of Availability (63 FR 59930-
59936), DOPP was offered in 42 counties. However, DOPP did not operate 
in Orleans County of Vermont; and Commanche, Erath, and Van Zandt 
counties of Texas because no producer in those counties elected to 
participate by purchasing put options. DOPP will no longer be available 
in any of the 42 counties included in the notice of November 6, 1998.
    The program will be available in the following States and counties: 
Maricopa County, Arizona; Marin and Sonoma counties, California; Weld 
County, Colorado; Gilchrist and Okeechobee counties, Florida; Morgan 
and Putnam counties, Georgia; Gooding, Jerome, and Twin Falls counties, 
Idaho; Clinton and Washington counties, Illinois; Elkhart and Marshall 
counties, Indiana; Clayton, Dubuque, and Winneshiek counties, Iowa; 
Nemaha County, Kansas; Adair and Barren counties, Kentucky; Carroll and 
Frederick counties, Maryland; Franklin County, Massachusetts; Allegan, 
Clinton, and Sanilac counties, Michigan; Fillmore and Wabasha counties, 
Minnesota; Webster and Wright counties, Missouri; Gage County, 
Nebraska; Chaves, Lea, and Roosevelt counties, New Mexico; Madison and 
Wyoming counties, New York; Iredell County, North Carolina; Ashtabula, 
Mercer, and Wayne counties, Ohio; Adair and Mayes counties, Oklahoma; 
Marion and Washington counties, Oregon; Lebanon and Tioga counties, 
Pennsylvania; Deuel and Grant counties, South Dakota; McMinn County, 
Tennessee; Archer County, Texas; Cache and Utah counties, Utah; 
Washington County, Vermont; Franklin and Rockingham counties, Virginia; 
Skagit, Snohomish, and Whatcom counties, Washington; Barron and Shawano 
counties, Wisconsin. 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. 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 12 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 4 months to purchase DOPP options and all DOPP options must 
expire within 12 months from the month the producer attends the 
training session. Producers

[[Page 9239]]

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 NYBOT 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 period extending from 
a minimum of 2 months to a maximum of 12 months following the date the 
producer attends DOPP training. 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.
    On November 6, 1998, RMA published a Notice of Availability in the 
Federal Register at 63 FR 215 in which DOPP was offered as a pilot in 
selected counties in the states of California, Minnesota, New York, 
Pennsylvania, Texas, Wisconsin, and Vermont. A total of 428 dairy 
producers from 38 counties participated in the program by buying a 
total of 1,701 put options.
    An assessment of the first round of the program revealed that some 
changes were warranted. In addition to minor reformatting and word 
changes for clarity, RMA has made the following changes to DOPP:
    1. In section 1 of the producer contract and section 1 of the 
broker contract, RMA added a definition for ``abandonment'' to 
recognize this alternative which is available to a buyer of an option 
for resolving contractual rights and obligations associated with an 
option that will expire worthless; added a definition for ``contract 
month'' and deleted the definition for ``strike month'' to conform to 
the more common terminology used by brokers and hedgers; changed the 
definition of ``futures contract'' to avoid confusion regarding 
contract markets, wherein obligations of performance are created, and 
cash commodity markets, wherein the actual commodity is transferred; 
added a definition for ``NYBOT'' (the New York Board of Trade) and 
changed the definition of the ``CSCE'' to reflect the name change by 
that futures exchange (also, all references to the CSCE were changed to 
the NYBOT in both the producer and broker contracts); changed the 
definition of ``expiration date'' to reflect the possibility of selling 
before expiration; changed the definition for ``premium'' to eliminate 
possible confusion between the value of the option and strike price for 
an option; changed the definition of ``round turn'' to reflect the 
alternative of abandonment as a method of liquidating a put position 
and also to clarify RMA's responsibilities in the event a put buyer 
under DOPP wishes to exercise a put; and changed the definition of 
``sale'' to avoid confusion between option contract markets, wherein 
obligations of performance are created, and asset markets, wherein 
titles of property are transferred.
    2. In section 3(a)(1) of the producer contract and section 3(a)(1) 
of the broker contract, the time in which producer has to buy options 
in the program was changed from 2 to 4 months from the date the 
producer attends the training and information session. In the first 
round of the program, many participants indicated that 2 months did not 
provide sufficient time to observe the market and to implement a sound 
buying strategy.
    3. In section 3(a)(1) of the producer contract, a phrase was added 
that allows producers to not fulfill their obligation to buy put 
options in the program if market conditions fail to provide price 
protection that exceeds production costs. This provision was added to 
ensure that producers will not be required to buy puts during periods 
when that strategy may not be in the producer's economic interest.
    4. In section 3(a)(8) of the producer contract and section 3(a)(7) 
of the broker contract, the requirement that all options purchased in 
the program will expire no more than 6 months after the month of 
purchase was changed to 12 months from the month the producer attended 
the DOPP training session. Some participants in the first round of the 
program indicated that the 6 month forward limitation prevented 
producers from considering more favorable opportunities in contract 
months more than 6 months forward.
    5. Section 3(a)(9) was added to the producer contract to ensure 
that producers are aware of their financial responsibility for any 
losses and brokerage commissions if they choose to exercise any put 
options before expiration.
    6. In section 3(c) of the producer contract, the deadline for 
submitting a properly completed and executed application was changed 
from within 14 days after receiving notification and application 
materials from RMA through the mail to within 14 calendar days after 
attending a DOPP training session. An application postmarked within the 
deadline will be considered valid. Participants in the first round of 
the program indicated that requiring producers to execute the 
application before having the opportunity to learn about the program in 
the training session discouraged many prospective participants.
    7. In section 6(d) of the producer contract and 5(b) of the broker 
contract, the description of possible program changes was revised to 
reflect current information regarding Federal Milk Marketing Order 
reform.
    8. In section 3(b)(3) of the broker contract, the requirement to 
report the strike price, contract type, and exchange was added. This 
change was made to reflect that this additional information is needed 
to assess the program and that this information was collected during 
the first round of the program.
    9. Section 4(d) of the broker contract was added. This change makes 
the financial responsibilities of the producer for futures transactions 
explicit, in the event a put option is exercised.
    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

    Abandonment. The surrender of the right possessed by an option 
buyer, an alternative available to an option buyer whose option is to 
expire worthless.
    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.

[[Page 9240]]

    Contract Month. A month designated in an eligible market for which 
futures and options contracts are quoted for trading.
    CME. Chicago Mercantile Exchange.
    CSCE. Coffee, Sugar, and Cocoa Exchange (now known as the NYBOT).
    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 a put option may be 
exercised or sold.
    Futures contract. A standardized contract to make or take delivery 
of a commodity traded on an eligible market at some point in the 
future.
    Hedge. To take compensatory measures to counter a possible loss.
    NYBOT. The New York Board of Trade (formerly known as the CSCE).
    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 with a strike price that is less than 
the underlying futures contract price.
    Premium. The value 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, but not the obligation, 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, exercise, or abandonment) of a put option.
    Sale. An alternative available to the purchaser of an option by 
which the option is liquidated through an offer in an eligible market.
    Secretary. The Secretary of Agriculture.
    Settlement price. The price established at the end of each day's 
trading for a specific put option as published by the exchange on which 
that contract trades.
    Strike price. The price at which the holder of a put option has the 
right, but not the obligation, to 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 loan 
deficiency payment, a non-recourse marketing assistance loan or any 
other assistance under title I of the Federal Agriculture Improvement 
and Reform Act of 1996;
    (2) Operate a dairy farm located in a county selected for the pilot 
program;
    (3) Have documented production history of at least 100,000 pounds 
of milk production over any consecutive six month period during the 
most recent 12 months; and
    (4) Execute this contract and comply with its terms and conditions.
    (b) This program is available to milk producers in states and 
counties designated.

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 receive training on the use of put options and the program's 
operations;
    (2) To purchase put options on a minimum of 100,000 pounds of milk 
on an eligible market, through an eligible broker, within 4 months 
after the date the producer attends the required training session, 
unless market conditions fail to provide an opportunity to establish 
price protection that exceeds production costs;
    (3) To purchase put options on no more than 200,000 pounds of milk 
for any one contract month;
    (4) To purchase put options on no more than the producer's total 
production over the consecutive 6-month period used to establish the 
producer's eligibility. (For example, if a producer has provided copies 
of marketing receipts for 245,000 pounds of total milk production for a 
consecutive 6 month period to meet the eligibility criteria of the 
program, only 200,000 pounds can be hedged under the program because 
there are no contracts equal to or less than 45,000 pounds currently 
available on an eligible market);
    (5) To purchase only those put options that expire at least two 
months after the purchase date ( For example, assume the producer wants 
to hedge September 1999 production with BFP put options. The last date 
on which the producer shall be able to purchase a September put option 
under the program would be Tuesday, August 3, because September options 
expire exactly two months later, on October 4. On August 4, the 
producer could purchase only October or more distant options;
    (6) To purchase only those put options with a strike price that is 
at least 10 cents out of the money;
    (7) That no put option will be sold or exercised before four weeks 
prior to the expiration date (For example, assume the producer owns 
September, 1999 put options which expire on October 4, 1999. The 
producer would not be allowed to sell or exercise September options 
under the program prior to September 6);
    (8) To purchase only those put That all options purchased shall 
expire during the month that is not more than 6 with contract months 
less than 12 months after the month of purchase from the month of 
training (For example, assume a producer is trained on June 7, 1999, 
and makes all purchases in the months of June and July. The most 
distant option contract the producer is permitted to buy is the May 
2000 contract); and
    (9) To assume any losses from the underlying futures contract if 
the producer chooses to exercise any put option rather sell the option 
or abandon it.
    (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 to RMA within 14 calendar days after 
attending a DOPP training session 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. An application postmarked within the deadline will be 
considered valid.

4. Costs

    (a) The producer will pay to the broker 20 percent of the premium 
for each put option purchased.
    (b) RMA will pay 80 percent of the premium to the broker on behalf 
of the producer and will pay transaction costs not to exceed $30 per 
round turn for each option purchased. The producer is free to deal with 
brokers who charge more than $30 per round turn, but will be 
financially responsible for amounts that exceed $30.

[[Page 9241]]

    (c) The producer is solely responsible for any commission cost 
associated with futures contracts created when put options are 
exercised.

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) A producer will be able to place orders for put options with a 
broker under DOPP only after the broker has obtained verification from 
RMA of the producer's selection as a program participant and the date 
the producer received training. RMA will notify eligible brokers 
electronically after their selection by a producer.
    (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 cost sharing of option premiums and broker fees 
paid by RMA on behalf of the producer.
    (e) The agreement is not effective until the producer executes and 
returns the 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 execute orders on behalf of DOPP participants.
    (b) To assist in the evaluation of the program, participating 
producers may be asked to complete entry and exit surveys by RMA. 
Producers are encouraged to complete these surveys to assess this 
program's effectiveness.
    (c) There may be tax consequences with respect to participation in 
this program. Producers interested in the program who have questions 
regarding related tax issues should seek the advice of a competent tax 
advisor.
    (d) Because of likely implementation of Federal Milk Marketing 
Order reform, the NYBOT or CME could replace existing BFP options 
contracts with options derived from other milk price indexes. DOPP will 
permit the trading of put option contracts on a milk price index which 
replaces the BFP under a new Federal Milk Marketing Order.
    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

    Abandonment. The surrender of the right possessed by an option 
buyer, an alternative available to an option buyer whose option is to 
expire worthless.
    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.
    Contract Month. A month designated in an eligible market for which 
futures and options contracts are quoted for trading.
    CME. Chicago Mercantile Exchange.
    CSCE. Coffee, Sugar, and Cocoa Exchange (now known as the NYBOT).
    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 a put option may be 
exercised or sold.
    Futures contract. A standardized contract to make or take delivery 
of a commodity traded on an eligible market at some point in the 
future.
    Hedge. To take compensatory measures to counter a possible loss.
    NYBOT. The New York Board of Trade (formerly known as the CSCE).
    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 with a strike price that is less than 
the underlying futures contract price.
    Premium. The value 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, but not the obligation, 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, exercise, or abandonment) of a put option.
    Sale. An alternative available to the purchaser of an option by 
which the option is liquidated through an offer in an eligible market.
    Secretary. The Secretary of Agriculture.
    Settlement price. The price established at the end of each day's 
trading for a specific put option as published by the exchange on which 
that contract trades.
    Strike price. The price at which the holder of a put option has the 
right, but not the obligation, to sell the underlying futures contract.
    USDA. The United States Department of Agriculture

2. Eligibility

    (a) To be eligible to execute option orders on behalf of DOPP 
participants under this agreement, a broker must:
    (1) Be properly licensed; and in good standing with the National 
Futures Association;
    (2) Not be suspended or debarred by any U.S. Government Agency;
    (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 participate in the program agree to enforce the 
following

[[Page 9242]]

program requirements with respect to any DOPP participant who elects to 
purchase options and who uses the broker's services:
    (1) To buy put options on a minimum of 100,000 pounds of milk on an 
eligible market, through an eligible broker, within 4 months after the 
date the producer attends the required training session, unless market 
conditions fail to provide an opportunity to establish price protection 
above production costs;
    (2) To purchase put options on no more than 200,000 pounds of milk 
for any one contract month;
    (3) To purchase put options on no more than the producer's total 
production over the consecutive 6-month period used to establish the 
producer's. (For example, if a producer has provided copies of 
marketing receipts for 245,000 pounds of total milk production for a 
consecutive 6 month period to meet the eligibility criteria of the 
program, only 200,000 pounds can be hedged under the program because 
there are no contracts equal to or less than 45,000 pounds currently 
available on an eligible market);
    (4) To only those put options that expire at least two months after 
the purchase date ( For example, assume the producer wants to hedge 
September 1999 production with BFP put options. The last date on which 
the producer shall be able to purchase a September put option under the 
program would be Tuesday, August 3, because September options expire 
exactly two months later, on October 4. On August, the producer could 
purchase only October or more distant options;
    (5) To purchase only those put options with a strike price that is 
at least 10 cents out of the money;
    (6) That no put option will be sold or exercised before four weeks 
prior to the expiration date. (For example, assume the producer owns 
September, 1999 put options which expire on October 4, 1999. The 
producer would not be allowed to sell or exercise September options 
under the program prior to September 6); and
    (7) To purchase only those put options with contract months less 
than 12 months from the month of training. (For example, assume a 
producer is trained on June 7, 1999. The most distant option contract 
the producer is permitted to buy is the May 2000 contract).
    (b) The broker must keep detailed records on each transaction and 
transmit all transaction information to RMA electronically. RMA will 
provide the broker with communications software for this purpose. 
Records required to be submitted by the broker to RMA include:
    (1) The purchase date, time, premium, strike price, contract type, 
and exchange for each put option;
    (2) The expiration date and contract month for each put option;
    (3) Whether the options are sold, exercised, or abandoned, and the 
date, time, and price of the futures contract transaction, in the event 
of exercise.
    (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 requirement.
    (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 for 
each put option purchased on behalf of a producer. 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 of each put option purchased. This 20 percent of the put 
option premium 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 put option premium, 80 percent, to RMA. RMA will pay 
these amounts via the automated clearing 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.
    (d) The producer is solely responsible for any broker commissions 
or other costs associated with futures contracts when put options are 
exercised.

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.
    (d) Because of likely implementation of Federal Milk Marketing 
Order reform, the NYBOT or CME could replace existing BFP options 
contracts with options derived from other milk price indexes. DOPP will 
permit the trading of put option contracts on a milk price index which 
replaces the BFP under a new Federal Milk Marketing Order.

    Signed in Washington, D.C., on February 18, 2000.
Kenneth D. Ackerman,
Administrator, Risk Management Agency.
[FR Doc. 00-4376 Filed 2-23-00; 8:45 am]
BILLING CODE 3410-08-P