In testimony before Congress, Jon Hixson of Cargill portrayed his company’s use of derivative as an aid to small business. (I provide a link to the full testimony below.)
Testimony Before the House Committee on Financial Services On Reform of the Over-the-Counter Derivative Market: Limiting Risk and Ensuring Fairness
“We offer customized hedges to help bakeries manage price volatility of their flour so that their retail prices for baked goods can be as stable as possible for consumers and grocery stores,” he told the committee’s wagging heads. “We offer customized hedges to help a restaurant chain maintain stable prices on their chicken so that the company can offer consistent prices and value for their retail customers when selling chicken sandwiches.”
Cargill earned 525 million dollars in the first quarter of this year. The total company is valued at 6 billion dollars according to its SEC filing.
Thus, we have clear evidence that derivatives are beneficial to Cargill. But when you read the testimony there is an absence of any numbers pointing to benefit for any of these small businesses. In fact, we are essentially asked to simply believe Cargill’s point of view.
I prefer numbers and verifiable evidence.
Derivatives are controversial because the use of derivatives during the 2007 economic crisis has been catastrophic destroying many financial institutions and were instrumental in creating the continuing economic difficulties.
It might be wiser to forego the use of derivatives for safer financial instruments. While derivatives may aid small business, they are also risky instruments. Do these different rationales conflict? Yes. Are there other choices? I am sure that in the multitude of financial instruments being sold today, there are other options.
I do have one question not addressed in the testimony, “In these transactions, who bears the risk of loss, Cargill or the small businesses?” I have seen that Goldman Sachs when using derivatives charged the investors with purchasing insurance to make sure the company suffered no loss. Is this the case here?