Brewers cheer: Obama’s financial reform bill stumbles in Senate
MillerCoors and other brewers buy huge quantities of wheat, rice, malt, sugar, and corn. The prices of these commodities can swing wildly, so the financial products known as derivatives – in other words, hedges on whether prices will rise or fall - help the brewer lock in a price range that smoothes profits.
In December 2009, the House of Representatives exempted brewers and other end users of derivatives from the collateral rules. Now the Obama Administration is pushing the Senate to narrow this exemption, potentially forcing brewers to ante up collateral.
As part of their lobbying efforts, brewers Anheuser-Busch and MillerCoors have reminded lawmakers that they buy billions of dollars worth of farm commodities and employ thousands of union workers.
AB-InBev controls half the U.S. beer market and operates a dozen breweries. It owns 11 distributors and works with 600 independent wholesalers. It buys rice in Arkansas and California, grows hops in Idaho, and makes glass bottles in Texas.
MillerCoors, which controls about 30 percent of the U.S. market, brews in nine states. It buys all its corn and most of its barley – some USD 500 million a year - in the U.S., it was reported
According to media estimates, AB-InBev had more than USD 1 billion in aluminum swaps, USD 69 million in corn swaps, and interest rate swaps - used to counter swings in currencies - worth more than USD 80 billion.
If aluminum swaps - primarily private contracts between two parties - were forced to go through a clearinghouse (another proposal by the Obama Administration), AB-InBev would have to cough up as much as 6 percent of the cost of a contract.
Experts have worked out on the back of an envelope that AB-InBev’s USD 1 billion in aluminum swaps alone would require collateral whose value could swing by USD 10 million a day if the price of the metal were to change 1 percent.
At the end of April, President Obama’s financial reform bill suffered a setback, but the setback is not likely to be permanent. Lawmakers in both parties are said to be working hard on a possible bipartisan compromise.
Yet, whatever compromise the Senate produces, it would have to be merged with the House of Representative’s bill before a final measure could go to President Obama to be signed into law. Analysts expect that by mid-year.
This means that brewers will have to pour yet more money and effort into lobbying Washington lawmakers.
