Washington UpdateNECC

March 11, 2013

Today’s Update

• 2012 Elections

• Fiscal Cliff(s)

• Regulatory and Legislative Issues

Major Government Influences 2012 vs. 2013

White House Control No Change

Senate Control No Change

House Control No Change

Senate Leadership No Change

House Leadership No Change

The end result doesn’t seem to change…

Electoral Votes 332-206 ObamaCounties Romney 2,421 vs. Obama 693

2012 Elections: What did change?

• Perception = Power (for now)• Speaker Boehner’s job even more

difficult• House GOP not in a position of

strength• But Obama’s position of strength is

clearly limited

The Coming Cliffs….

An Ever Widening Budget Gap

How Did We Get Here?

Where the Federal Budget Goes…

• Social Security $770 billion• Defense $680 billion• Medicare $560 billion• Medicaid $262 billion• Debt Interest $224 billion

– Total: $2.5 trillion

• Total FY 2012 Budget $3.6 trillion– Total FY 2012 Deficit $1.1 trillion

The President’s Balanced Budget/Deficit Reduction Plan/Deficit Reduction Plan

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NCFC: Representing the Policy & Business Interests of Farmer Co-ops

• Protecting the Capper-Volstead Act

• Working to ease the regulatory burden on co-ops and their members

• Preserving risk management options

• Possible tax reform and its impacts

• Ensuring an adequate labor force• Advocating for co-ops in the

farm bill

Protecting the Capper-Volstead Act• In 2010, DOJ/USDA workshops on competition in agriculture

– Potential antitrust enforcement, including Capper-Volstead– NCFC and members: Farmer Co-ops: Providing for America Campaign– Threat of government action has receded; however,

• Challenges continue in the courts with civil law suits largely based on whether CV allows farmers and co-ops to engage in pre-production supply management– Eggs: Alleges supply management due to increasing cage size– Potatoes: Complaints challenging supply management practices– Dairy: Challenge to Cooperatives Working Together program, a voluntary

program to stabilize milk prices– Additional cases coming?

NCFC and its LTA Committee continue to engage on such anti-trust issues

Regulatory Issues• USDA/DOJ antitrust workshops• GHG Regulatory Reporting Requirements• GHG Requirements for Stationary Sources• Biotech approval process• GIPSA rulemaking• Dietary Guidelines• Nutritional standards in school lunch and school

breakfast• CAFO rules & stepped up enforcement• CERCLA/EPCRA• Spray Drift• Atrazine review• Clean Water Act expansion• Dust• VOCs• NOx• NPDES pesticide general permit • Spray drift labeling proposal • Spray drift petition • ESA Consultation• ESA NMFS BIOP extension• ESA County Bulletins on Pesticide Labels• Revised Worker Risk Policy• Lifecycle analysis of biofuels• Gulf hypoxia• Chesapeake Bay initiative• Nutrient management criteria changes• Spill Prevention, Control, and Countermeasure

• NSPS for grain elevators• Lifecycle analysis of biofuels• Interagency development of oceans policy• Mississippi River Basin Initative• Sustainability standards • EPA-IRIS review of urea as carcinogen• 590 Standard revisions for phosphorus• BoilerMAC regulations• CFTC derivatives rulemakings• Value-Added Producer Grants• Co-op eligibility under Market Access Program• Pension relief• Labor requiring private sector employers to notify

employees of their right to unionize• No-Match• E-Verify• H-2A• DOT Hours of Service• Brazil WTO case and the GSM-102 program• Crop Insurance• Biomass Crop Assistance Program

Regulatory Issues• Hours of Service Ag Exemption: DOT enforcement actions starting in

2009. Solution: Clarification in 2012 highway bill that includes all farm supplies (within 150 air mile radius).

• 2011: DOT contemplated new guidance on Interstate vs. intrastate commerce/Crop Sharing and Commercial Driver's License/Implements of Husbandry. 1700 comments resulted in DOT issuing a statement it would not impose new rules on farmers.

• 2009 FDA crackdown on canola meal from Canada (increased dairy feed cost $30/ton). FDA relaxes salmonella rule on animal feed in 2011.

• 2012 OSHA proposes new safety regulations for child farm workers. Rule withdrawn and will not be pursued. But regional enforcement issues persist (grain handling).

• EPA…dust and fly overs…..

The Dodd-Frank Wall Street Reform and Consumer Protection Act

• Passed by Congress in response to the financial crisis

• Signed into law on July 21, 2010

• Sixteen Titles and 2,319 pages (compared to Sarbanes-Oxley’s 66 pages)

• Regulation of the Over-the Counter Derivatives Markets; a.k.a. Swaps

Preserving Risk Management Tools for Farmer Cooperatives and Their Members

Objective: Preserve co-op ability to hedge risk & offer customized risk management tools to farmers

• Swaps are not “forward” physical delivery contracts: They are financially settled transactions privately negotiated between a buyer and a seller

• Swaps are not “exchange traded,” and it’s estimated that less than 1% of agricultural swaps are “cleared”

• The main advantage is swaps are more flexible -- the parties can set their own time period, quantities, determine prices and margin requirements, etc. Also becoming more important in illiquid markets like dairy and fertilizer

• Swaps also help co-ops offer forward contracts by freeing up working capital otherwise needed to be posted as margin

• If farmer co-ops were to be regulated like Wall Street, offering these products would become cost prohibitive

An example of Co-ops and Swaps: Grain

Swaps With Producers: Livestock

Dairy Co-op Swaps

Dairy Co-ops enter into swaps to hedge the price risk of guaranteeing their farmers a minimum price for milk to be delivered in the future (forward contracts) because:1.Swaps sizes can be tailored to fit the need, and/or2.Volume is too large to hedge on CME

Dodd-Frank Implementation

NCFC’s greatest concern was the uncertainty surrounding the “entity definitions” rule.

– Some activities of co-ops were captured under the “swap dealer” definition contained in the proposed regulations

If farmer co-ops were to be classified as dealers, increased regulatory costs would have made providing those risk management services uneconomical – leaving co-ops, their farmers and customers fewer risk management tools to weather highly volatile commodity markets.

Dodd-Frank Implementation

Final “Entities” Definition Voted on by CFTC/SEC last April

– The determination of whether a person is a swap dealer excludes swaps between a cooperative – including agricultural cooperatives and cooperative financial institutions – and its members

– Entering into a swap for the purpose of hedging a physical position is not swap dealing

  – De minimis Exception: the aggregate gross notional amount of

the swaps entered into over the prior 12 months in connection with “dealing activities” must not exceed $8 billion/$3 billion

Dodd-Frank Implementation

Looking Ahead

– Most of the regulations have yet to go into effect – compliance issues

– The big question is whether or not costs will allow the OTC market to remain viable

• Reporting and recordkeeping issues (April for end users)• Capital and margin requirements for “dealers”• Will liquidity dry up? Ultimate costs of regulations unknown

Other CFTC Issues

• Proposed Customer Protection Rule

– In response to MF Global/Peregrine– Will margin/hedging costs increase?

• CFTC Reauthorization in 2013

– House/Senate Ag Committee hearings– Attempts to address Dodd-Frank

• Will Chairman Gensler stay?

Immigration ReformState-of-Play: Best Chance in Years

– Latino vote delivers for Obama

– Senate’s Bipartisan Gang of 8 working on comprehensive reform package (includes place marker for an ag piece)

– House working on legislation, including ag provisions

Ag Workforce Coalition Proposal

The proposal includes:

•Opportunity for earned adjustment of status by current agricultural employees who presently lack legal status

•Ensures that all types of producers—including both those with seasonal labor needs and ones with year-round labor needs—have access to the workforce they need

•Guest worker program to ensure an adequate farm workforce in the future

AWC Website: agworkforcecoalition.org

Tax Issues

• NCFC tax priorities as Congress turns to reforming the Code:

 – Maintain Subchapter T of the Internal Revenue Code and

related regulations.– Maintain Patronage Dividend Deduction.   – Oppose repeal of the Section 199 Deduction for Domestic

Production Activities Income.  – Oppose Repeal of the Deduction for Interest on Debt.– Oppose Repeal of LIFO Accounting Method.  – Oppose Repeal of Lower of Cost or Market Accounting Method. – Farmer Cooperatives Should Not Be Treated as “Passthrough”

Entities.

Trade• Trans-Pacific Partnership – will Japan join?

• U.S.-EU to begin Free Trade Agreement negotiations

• When will President Obama ask for Trade Promotion Authority?

Transportation

• Safe and Efficient Transportation Act (SETA) Reintroduced– Would increases maximum truck weights from 80,000 lbs to

97,000 lbs

Three Failed Attempts to Pass a Farm Bill in 112th

CongressRound 1:Super Committee

Round 2:Senate and House Ag Committee Bills Passed

Round 3:Lame Duck Session

Simply repeating what we did last year is a recipe to get the same result.

•Notable Obstacles to Success:– Overshadowed by other, more pressing

priorities– Division among the ranks– A quiet grassroots

Farm Bill: Round #4?

New Ranking Member on Senate Agriculture

CommitteeThad Cochran, R-Miss.

Thank you!