Posted December 21, 2016 by Dr. Steve Suppan   

FinanceMarket speculation

Used under creative commons license from davidcenterphotography.

On December 5, the Commodity Futures Trade Commission (CFTC)  announced it had voted to propose for the fourth time the position limit rule required by the 2010 Dodd Frank Wall Street Reform and Consumer Financial Protection Act. A Wall Street lawsuit in 2012 and the time required for CFTC staff to review an avalanche of industry comments delayed finalization of the rule. The CFTC published a fact sheet outlining the main features of the re-proposed 910-page rule and naming the 25 contracts subject to position limits.

Position limits on commodity derivatives contracts were proposed to prevent market manipulation and excessive speculation in agricultural, energy, base metals and precious metal contracts. During 2007-2009, excessive speculation by Commodity Index Traders, such as Goldman Sachs and Morgan Stanley, resulted in high and extremely volatile commodity prices. The commodity exchange self-regulation of positions, under the deregulatory Commodity Futures Modernization Act of 2000 (a 262-page bill attached to a must pass budget resolution), failed to prevent both excessive speculation and market manipulation, e.g. by Kraft Foods’ and Mondelez’s decade-long price fixing  of the Chicago Board of Trade wheat contract.

The December 5 announcement ended the CFTC’s efforts to finalize the rule during the Obama administration. On December 14, Senators Maria Cantwell, Sherrod Brown and Diane Feinstein wrote to CFTC Chairman Timothy Massad to criticize the failure to finalize the rule, despite Massad’s stated intent in May to do so this year.

The Republican member of the Commission, Christopher Giancarlo, a fierce critic of position limits, is likely to become the Chairman of the CFTC in the Trump administration. Given President-elect Trump’s promise to repeal large parts of the Dodd-Frank Act, the CFTC may not be required to do further work on the re-proposed rule after receiving comments by the March 2017 deadline. As succinctly put in The New York Times, “Are we going back to the precrisis nonregulation of derivatives?”

If so, said Dennis Kelleher, CEO of Better Markets, “then it’s time to start the countdown clock to the next financial crash which will make the last one look mild by comparison.” Are we doomed to suffer another, more severe and widespread financial crash under proposed Dodd Frank replacement legislation, such as H.R. 6392, which weakens the standards for designating systematically important financial institutions subject to stricter oversight?

Position limits are just one tool applied to regulate the smallest value asset class under CFTC jurisdiction. The Wall Street opposition to position limits is part and parcel of its opposition to transparent, standardized and near real time reporting of trades in larger value contracts, such as interest rate derivatives. Such reporting and aggregating of trade data positions by U.S. parent firms and their myriad foreign affiliates helps regulators determine whether defaults or liquidity crises among trading counterparties pose threats to the U.S. financial system that could result in another crash.

IATP first advocated for a position limit rule, as a signatory to a Commodity Markets Oversight Coalition letter in June 2009, for a bill that would become part of the Dodd Frank Act. We have continued to do so ever since, most recently submitting comments to the CFTC in July on the third version of the rule. Seven years later, is an effective position limit rule dead? Has the IATP’s work and the greater work of many other organizations to advance the rule been in vain?

It could be argued that finalizing a CFTC position limit rule would be fruitless unless the European Union regulators likewise finalize their rule, opposed by many of the same global banks and trading venues that opposed the CFTC rule. On December 1, the Brussels-based NGO Finance Watch announced they would recommend that the European Parliament reject the European Commission-adopted position limit regulations that European Union member state regulators would adapt and enforce by January 1, 2018.

Finance Watch charged that the regulations ignored important and clear guidelines in the Parliament’s Market in Financial Instruments Directive (MiFID) for setting position limits. If the Parliament rejects the Commission-adopted regulations, under the EU financial regulatory process, they will be sent back to the European Securities and Markets Authority for redrafting. Redrafting, and adoption by the Commission and then the Parliament, would likely mean that there would be no European position limit rules before the summer of 2017 at the earliest.

In the meantime, in order for European and other foreign firms to trade on U.S. commodity markets, the CFTC staff writes “regulatory relief” letters that extend the date by which those firms must comply with CFTC rules. For example, on November 21, the CFTC announced that it was extending—until December 1, 2017—“regulatory relief” for commodity derivatives contracts traded over-the-counter (OTC or swaps), i.e. not traded on regulated exchanges. Is repeated year-long “regulatory relief” from compliance with Dodd Frank and MiFID rules a permanent victory for Wall Street and the City of London banks and exchanges?

IATP has tried to take the long view on market regulatory reform. Rulemaking, compliance procedures and training, and developing computer software for trading, data record keeping, aggregation, verification and reporting under new rules must be achieved comprehensively to restore integrity to financial markets. It took eight years after the Commodity Futures Modernization Act of 2000 for Wall Street firms and their foreign affiliates to blow up asset price evaluations and trigger the global Great Recession. It will take many more years to implement and enforce reform of the derivatives markets, if the proposals to repeal and replace Dodd Frank are enacted under the Trump administration.

One wind at the back of Dodd Frank derivatives rule supporters is international regulatory organization initiatives about the unrelenting wave of rule violations and crime by global banks. In a comment on an International Organization of Securities Commissions consultation paper on cross border derivatives trading, IATP cited a 2015 letter from Financial Stability Board Chairman, Mark Carney to the G20 Finance Ministers and Central Bank Governors: “The scale of misconduct in some financial institutions has risen to a level that has the potential to create systemic risks. Fundamentally, it threatens to undermine trust in financial institutions and markets, thereby limiting some of the hard-won benefits of the initial reforms.”

Deutsche Bank, for example, a major recipient of 2007-2010 Federal Reserve Bank bailout money, harbors a “culture of criminality,” according to one Deutsche Bank whistleblower. Deutsche Bank continues to negotiate with the Justice Department to reduce the amount of money it owes for U.S. government purchases of its “toxic” (unsellable at any price) derivatives contracts. It’s not hard to imagine that the bank would call out to Donald Trump, who owes Deutsche Bank at least $300 million, for some “regulatory relief.’  As Deutsche Bank continues to violate CFTC rules, including position limits, it likely will need more “regulatory relief.”

It would be unfair to the CFTC to end this blog with reference to the morass of the incoming Trump administration’s conflict of interests with the Trump organization’s main banker and the perils for the financial system of returning to pre-crisis non-regulation.

The December 5 announcement also stated, “In a separate vote, CFTC approved final aggregation regulations, which are a key component of the CFTC’s existing position limits regime.”  The rule establishes the framework for exchanges to aggregate their trading data for reporting to and monitoring by CFTC staff to prevent market manipulation of prices and excessive speculation. The aggregation rule describes who must aggregate and report positions to the CFTC and who is exempt from doing so. However, the aggregation rule applies only to nine agricultural contracts. If the content of the final position aggregation rule is the same as the 2015 proposed rule, it is unlikely to be nullified under the terms of the Congressional Review Act.

IATP’s short comment on the 2015 supplement to the draft aggregation rule was critical of industry-proposed exemptions from aggregation. We wrote, “As the [technological] means to aggregate derivatives data in near real time become more feasible, the [industry] will to not aggregate seems to become stronger.” IATP noted that extensive exemptions from aggregation granted by the CFTC would run counter to the effort of the 36-member government Financial Stability Board to agree on an aggregation mechanism for over the counter (off exchange) trading data in all asset classes, not just commodities. Once operational, such a mechanism would enable FSB member regulators to access foreign trade data to determine whether cross border derivatives trading posed risks to their financial systems.

It appears that the CFTC position aggregation rule is at best one step forward and two back for global derivatives trade data aggregation and surveillance. IATP will be commenting this month on the CFTC’s proposed cross border trading rule. A blog in early 2017 will consider the interface of that rule with the position aggregation rule. 

Posted December 19, 2016 by Dr. Steve Suppan   

AgricultureTradeFree trade agreementsLaborNAFTA: North American Free Trade Agreement

There is little doubt that many supporters of the Donald Trump candidacy for President expect President-elect Trump to carry out his promise to deport millions of undocumented immigrants and to keep out more immigrants by building a wall along the U.S.-Mexico border. (The Center for Migration Studies estimated 11 million undocumented immigrants in the United States with about six million from Mexico.)

However, according to a 2014 report commissioned by the American Farm Bureau Federation, about half of all hired farm workers are undocumented immigrants. U.S. industrial-scale animal agriculture and horticulture depend on “the abundant supply of undocumented workers available and their willingness to accept transitory, seasonal, or physically arduous work that pays introductory wages that are unattractive to the U.S.-born.” According to a U.S. Department of Agriculture survey of farm labor, non-supervisory wages for all farm workers reported in 2012 averaged $10.80 an hour. How will the Trump administration both protect the agribusiness migrant labor dependent business model and fulfill the campaign promise to protect American jobs by deporting the undocumented?

Candidate Trump has said his administration would renegotiate the North American Free Trade Agreement (NAFTA) to get a better deal for the United States. Senator Sherrod Brown (D-OH) has called on the President-elect to make NAFTA renegotiation “an immediate priority once in office.” If there is bi-partisan support for renegotiation, how might it affect migrant farm workers?

As IATP’s Karen Lehman testified to Congress in 1993, the terms of the NAFTA agriculture chapter would drive a very conservatively estimated 600,000 to 700,000 Mexican farmers (and their families) off their land to the United States to look for work. According to a Mexican legislator, as of January 2015, about 550,000 Mexican farmers a year migrate to the United States. Stemming futures flows of Mexican farmers into the undocumented U.S. agricultural workforce will require renegotiating NAFTA to prevent agricultural export dumping, i.e. exporting at prices below the cost of production, with which the unsubsidized Mexican farmers cannot compete. 

Measures to end dumping will not be popular with agribusiness donors to Congressional elections and so are unlikely to be included in a renegotiated NAFTA. The flow of undocumented labor into U.S. agribusiness very likely will keep coming, both from Mexico and via Mexico, from the Central American Free Trade Agreement countries.

As if to anticipate that flow, the Farm Bureau currently advocates an “uncapped Agricultural Worker Visa Program (AWP) [that] will ensure agriculture’s future legal workforce.” For migrant farm workers currently residing in the United States, the Farm Bureau proposes—subject to requiring a worker’s commitment to agricultural labor “for several years”—an immigration policy according to which “the workers could obtain permanent legal status and the right to work in whatever industries they choose, including agriculture.”

“Permanent legal status,” much less citizenship with voting rights, is likely a non-starter with the incoming Congressional majority and their electoral support base. Thus, the Farm Bureau proposal looks at updating the 1942-1964 temporary Mexican Farm Labor Program. The Farm Bureau and the U.S. Chamber of Commerce supported the creation of that long-term force of temporary agricultural labor, which sabotaged the ability of farmworkers to organize for better wages, working conditions and temporary housing. That kind of labor “reform” might well appeal to a Republican majority and to a Trump White House because it would enable agribusiness as usual.

There are many other causes of migration besides trade policy that drive farmers out of business and into emigration. According to the United Nations’ International Migrant Report 2015, global migration is estimated at 244 million, with 47 million immigrants residing in the United Statesand 76 million in Europe.

One important emigration driver is climate change that is helping to degrade soil quality and fertility. Major investments to adapt to climate change by improving soil are absent and a recent report estimates that there will be about 50 million climate change refugees over the next decade.

President-elect Trump told The New York Times  that he is “keeping an open mind” about climate change but he nominated a climate change denier to be in charge of the Environmental Protection Agency. If the Trump administration climate policy does not come with U.S. funding for farmers in developing countries to adapt to climate change, the Farm Bureau advocated pool of permanent temporary migrant farmworkers could become much larger much faster.  

Posted December 16, 2016 by Dr. Steve Suppan   

AgricultureTradeTPPFree trade agreements

Congress has gone on recess without holding a vote to approve the Trans-Pacific Partnership (TPP) Agreement during the last days of the Obama administration. But on the day after the U.S. elections, Inside U.S. Trade reported that Senate Majority Leader Mitch McConnell reminded journalists that President Donald Trump will still be able to present new trade agreements for an expedited, no amendments vote under the 2015 Trade Promotion Authority Act. Free trade proponents are already fretting that Trump’s notion of a better trade deal would mean “protectionism.” But what does that term really mean?

Conventionally, “protectionism” describes government actions and policies, such as taxes on imports, i.e. tariffs, and import quotas to restrain international trade and to protect local economic development. “Free” trade is said to be the absence of such actions and policies, to maximize international trade and, in theory, produce benefits for all consumers and most workers.

However, as economist Dean Baker has written, “the TPP goes far in the opposite direction [from free trade], increasing protectionism in the form of stronger and longer patent and copyright protection.” He estimates that intellectual property protectionism increases prices of prescription drugs, software and other protected products by an equivalent to a several thousand fold increase in tariffs.

Furthermore, the investment chapter of the TPP and other “free” trade agreements increases protection for foreign investors by providing for private arbitration panels of corporate lawyers to sue governments for policies or actions believed to have diminished the value of their investments.  The TPP does not allow governments to sue investors for cross-border damage resulting from their investments.

Notwithstanding unanimous transnational agribusiness support for the TPP, the view from rural America—62 percent of whom voted for Trump—is quite different. With farm incomes plummeting for the third year in a row, and the level of farm debt to income the highest since the farm mortgage crisis in 1985, Trump’s tying the message of rural economic pain to the TPP was not a hard sell. But what kind and extent of protection did the Obama administration provide for farmers and ranchers, and indirectly for their input suppliers and landlords, to enable agribusiness exports?

The 2014 Farm Bill payments to compensate for falling crop and livestock prices were locked in for 2016 and so did not figure in the election debates. The Congressional Budget Office estimates that for fiscal year 2017, U.S. taxpayers will pay farmers and ranchers about $10.2 billion for commodity support programs, plus about $5.5 billion for conservation programs.

However, despite these payments, farmer and ranchers are caught in a cost-price squeeze, since USDA estimates that the costs of production will continue to be greater than the prices offered by agribusiness for their raw materials. For example, wheat farmers will pay about $6.50 to grow a bushel and receive $5.21 a bushel at their local grain elevators. The American Farm Bureau Federation commissioned a study that claims the TPP would increase wheat prices by $0.02 a bushel by 2025.

A more fiscally conservative policy is available to increase prices paid to farmers and decrease taxpayer support payments—supply management— to adjust supply to demand. But agribusiness has long opposed any form of supply management, most recently in the TPP negotiations.

TPP proponents didn’t explain how more agribusiness exports would make farmers profitable in the market place and reduce their dependence on government payments for survival. According to a Farm Bureau lobbyist, Trump’s supporters believe the best way to protect farmers is to eliminate regulation: “Without a doubt the rural Americans that supported Trump supported him mostly on his comments about the EPA . . . When you ask farmers their biggest concern, it’s always regulation.”

The Republican Party promised in its Platform to empower states, not the EPA, to protect rural families, water and soil from toxics. But if President Trump signs a bill to cripple the EPA, and farm debt continues to rise relative to income, will regulation remain the Farm Bureau’s biggest concern? Gutting the EPA will not increase farm profitability, but it will help protect “least trade restrictive” policy, imports and exports.

Posted December 6, 2016 by Shefali Sharma   

TradeTTIPIndustrialized MeatFree trade agreements

Launching the German edition of Selling Off the Farm. Center: ABL Chair Martin Schulz, right: Alessa Hartmann, PowerShift, Jochen Fritz (Coordinator of the Meine Landwirschaft Campaign); Left: Berit Thomsen, ABL, Shefali Sharma, IATP Europe.

Last week in Berlin, Arbeitsgemeinschaft bäuerliche Landwirtschaft e.V. (ABL), Meine Landwirtschaft (a broad platform of over 50 organizations demanding an alternative agricultural system), PowerShift and Institute for Agriculture and Trade Policy (IATP) Europe launched the German version of our report Selling Off the Farm to highlight why trade agreements such as the Comprehensive Economic and Trade Agreement (CETA, between Canada and the EU) and the Transatlantic Trade and Investment Partnership (TTIP, between the U.S. and EU) will be disastrous for European agriculture. Given that German farmers are struggling in one of Europe’s biggest farm crises, a rise in imports from North American “factory” farms, lax food safety rules and greater corporate control will make an agriculture deal in CETA and TTIP very costly and perhaps the last straw for European family farms.

Like the European Parliamentarians in Brussels, ministers of the German Parliament (Bundestag) were surprised to learn how integrated the North American meat market is and even more shocked to learn that only two companies control 90 percent of the beef sector in Canada and only four in the U.S.  

If CETA is implemented, 50,000 tonnes of beef (largely fresh, but nearly 1/3 frozen) will be allowed into the EU market on top of the 11,500 tonnes of high quality “Hilton beef” exports shared between the U.S. and Canada (granted after the WTO hormone dispute). CETA will allow Canadian Hilton beef to enter duty-free into the EU market. In addition, EU will allow 80,000 additional tonnes of Canadian pork duty free as part of CETA.

While the EU dismisses these significant volumes as only 0.04 percent and 0.06 percent respectively of total European beef and pork produced—European farmers calculate a very different conclusion:

For several years, Canadian pork has sold for up to 60 percent less than European pork. In 2014, despite the price crash in the European pork sector, the Canadian price was still 25 percent lower. In part this is because Canadian pork producers are paid 15-35 percent less than their European counterparts. Should CETA allow for an opening of those markets, under current conditions Canadian producers would be able to offer their products in the EU at a much cheaper price than comparable EU producers.1

Pork Farmer and ABL Chair Martin Schulz, who was present at meetings at the Bundestag and at our public debate with MPs, emphasized that even small quantities of pork imports dramatically depress prices in the EU since the EU market has a surplus. The imports allowed through CETA would be devastating to thousands of independent pork farmers who cannot compete with the vertically integrated contract farming system of North American pork production.   

The extreme concentration and contract system has created a dramatic shift out of pork farming in Canada and competition with this North American giant is likely to speed up the transformation of European family farms into contract labor as well:

The Canadian meat industry lauds CETA, indicating that it would create many more jobs in the country’s meat sector. It also looks forward to the technical negotiations to remove any other trade barriers in the form of food safety (such as chemical rinses to wash meat carcasses) –indicating quite clearly that the industry plans to use the built-in regulatory cooperation agenda in CETA to continue lowering EU standards once the agreement is enacted.

Germany was the second stop for our Selling Off the Farm tour as Sujata Dey from Council of Canadians and IATP’s Sharon Treat continue this week through Hungary, France, Slovenia and Poland. Along the way, they are highlighting the fundamentally different structures of the North American and European agriculture market and why these agreements would hurt European agricultural producers.

1. “CETA’s threat to agricultural markets and food quality.” In Making Sense of CETA, 2nd Edition, pgs. 51-58.: https://power-shift.de/making-sense-of-ceta-en/

Posted December 1, 2016 by Shefali Sharma   

TradeTTIPFree trade agreements

Our tour across Europe on Selling Off the Farm Corporate Meat’s Takeover Through TTIP and its links to the EU-Canada Comprehensive Economic and Trade Agreement (CETA) launched on November 29 at the European Parliament. IATP’s Senior Advisor, Sharon Treat, Waldemar Fortuna from the Polish organization, IGO and I met with several members of the European Parliament (MEPs), including coordinators of different political parties that will decide CETAs fate  in early February.

In the last two years, there has been an unprecedented awakening by ordinary citizens across Europe about the damage that free trade agreements do to policy making in the public interest. People have begun to understand that treaties, such as CETA and the Transatlantic Trade and Investment Partnership (TTIP), give transnational corporations even more power to expand and consolidate than they already possess. Many citizens have begun to challenge key elements of these agreements—such as the provisions that allow these corporations to sue governments for enacting public policies that might dampen their profits.

We set out to highlight key concerns that our research revealed about how agreements such as TTIP (and CETA) undermine their jobs as Parliamentarians, particularly when it comes to issues Europeans really care about like cloning, GMOs, and how meat is produced and processed. It became evident quite quickly that while many agreed or hesitatingly admitted that perhaps TTIP went too far in that realm, they were more than relieved to be able to say that CETA was no problem at all.

While politics in many of their countries involves serious crises in the agriculture sector—crashing dairy prices, rising input costs, a struggling beef production sector, the phasing out of small family farms—many of them believed that the competition with Canada would be beneficial to European farmers. Some Eastern European MEPs felt that joining the EU had transformed their economies in a positive direction, so certainly further opening up to free trade deals with industrialized countries will also be beneficial.

Never mind that CETA contains many of the same provisions that TTIP would, or that the Canadian meat market is not really “Canadian,” but rather North American. One of the clear outcomes of the North American Free Trade Agreement (NAFTA) has been the integration of the North American meat and feed industries. As a result, the meat industry can shuttle animals between the U.S., Mexico and Canada to cut costs of production and still market products as made in Canada or the U.S. That is until the U.S. implemented Country of Origin Labeling (COOL) for meat that required processors to state where the animal was born, raised and slaughtered. Ironically, Canada and Mexico, on behalf of the North American Meat Industry, put an end to this much desired consumer demand. They brought a challenge to the World Trade Organization, complaining that the U.S. law goes against free trade, and they won. The congressional lackeys of the meat industry in the U.S. were only too happy to repeal the law. 

The European Parliamentarians have failed to understand this dynamic, that a free trade deal with Canada on agriculture, particularly meat, is also a deal with the United States—because these companies are neither American or Canadian. They are both. And what this means is that CETA, like TTIP, will hasten a very different agriculture system than what most European farmers and consumers want.

JBS and Cargill together control 90 percent of beef processing in Canada. And perhaps by 2019, JBS will be headquartered in Ireland. It is the world’s largest meat processor and also one that has aggressively bought out major brands in the U.S. and worldwide. Though currently headquartered in Brazil, having received substantial support from Brazil’s national development bank BNDS to become a “national champion,” the company had plans to move to Ireland this year, but BNDS shot this down recently. However, JBS’s shareholder agreement with BNDS ends in 2019 after which the company would be free to relocate to Europe.

The disconnect between these Parliamentarians and the voters they represent couldn’t be more stark—and I was reminded of Donald Trump’s election as President.  How badly the Democrats had miscalculated the disenfranchisement of Americans from their democracy, how angry they are at corporate control of that country—that they are willing to elect someone, even a corporate tycoon, who says that he will end corporate control, create jobs and end free trade deals that hurt American citizens. I am afraid for the European Parliament and for the European Project, because as long as they continue to ignore the protests and petitions and rightful critiques of these free trade deals, they are likely to repeat the same mistake that has, in part, led to Brexit and Trump.




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