After MF Global crisis, farmers may hedge on hedging


January 9th, 2012

By Jeremy Bernfeld and Eric Durban

Garden City, KS – Though hedging on the commodities market often comes in handy for many of the nation’s farmers, some may be reconsidering their strategies in the wake of MF Global’s bankruptcy. The large derivatives trading firm lost $1.2 billion in customer money, much of it from Midwest farmers.

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Hedging by way of the commodities market often comes in mighty handy for many of the nation’s farmers.

But in the aftermath of derivatives trader MF Global’s recent bankruptcy in which $1.2 billion in customer funds, much of it from Midwest farmers, went missing some observers are questioning whether farmers and other investors might reconsider their options.

Traders in the wheat futures trading pit at the Kansas City Board of Trade signal each other in September 2010. The KCBOT and Chicago Mercantile Exchange host two of the country's largest commodities markets. (Photo by Tammy Ljungblad, courtesy Kansas City Star)

Unless the matter is resolved quickly, “this (MF Global bankruptcy) will have long-term negative impact on risk capital in the commodity markets,” said Harold Bradley, a former commodities trader and stock investor, and a former executive at the Kansas City Board of Trade.

Jittery investors, Bradley said, will pull excess money from their accounts, brokerages won’t be able to make enough money and the entire industry may have to change.

“People will run for the hills and they won’t come back,” Bradley said.

At this point, however, it’s not clear if farmers are running for the hills, or if they are, how far they’ll actually run particularly because the commodities market is pretty much the only game in town.

“That’s the key issue, is whether or not farmers lose faith in the futures market,” said Sen. Pat Roberts.

Roberts, a Republican from Kansas, is a member of the Senate Agriculture Committee, which has some oversight of agricultural futures trading part of the $40 trillion commodities marketplace. He said his office has been swamped with angry farmers calling about the bankruptcy, but he’s urging calm.

“It’s going to be hard not to jump to assumptions or get down in the dumps here about the futures market, but let it play out, let the facts come out as they will,” Roberts said.

The U.S. Commodity Futures Trading Commission, which regulates the futures market, is investigating the missing customer funds at MF Global and said it can’t comment.

The thing is, the missing money at MF Global wasn’t lost in bad investments; it was simply set aside in customers’ accounts, like a bank account.

The money was intended for the commodities market, where farmers often lock in a price for the wheat, corn, soybeans or whatever they plan to sell in the future. This “hedging” is a way to mitigate risk in an industry that has a lot of variables beyond the farmer’s control.

Hedging was an important business tool this year for Brian Dunn, a farmer and rancher from St. John, Kan., who was dealing with the uncertainty of drought. He had $30,000 in an MF Global account.

“Had,” as in, past tense, because Dunn’s $30,000 is part of the $1.2 billion that the bankruptcy trustee can’t find.

“I’m like any other farmer or rancher and totally understand the risk associated with trading commodities, and you either win or lose depending on where the market goes,” said Dunn, who was getting ready to put a cattle hedge on when his account vanished.

Lynn Wagnon, a commodities broker in Coldwater, Kan., said that his clients had believed that their money was safer at MF Global than in a bank.

“I grew up where a handshake is your bond, and most ag people were raised that way,” Wagnon said. “A lot of people tell me they’re more saddened by that than maybe even losing their money.”

Even though he’s seen a recent dip in trading, Wagnon said in late December, he didn’t think the crisis at MF Global would have a long-term impact on the market, as long as farmers can get assurances that this won’t happen again. Commodities traders and markets have been eager to provide those assurances.

“The agriculture markets are going to continue on,” said Jerry Gidel, an analyst who specializes in the cash and futures grain markets at North American Futures Trading in Chicago.

In many ways, farmers don’t have much of a choice.

“The farmer can’t pull out of the commodities markets because that’s his price of his corn and soybeans – they’re still going to be determined by the commodities markets,” Gidel said.

Bradley, the former commodities trader, however, thinks the MF Global mess shows the entire system’s faults.

“It is an attack on the very essential function provided by central clearing organizations and exchanges in this country,” said Bradley, who today is the chief investment officer at the Kaufmann Foundation, a Kansas City-based nonprofit that makes grants in support of entrepreneurship and education. “But there is a whole lot of capital that’s missing and people are praying, but it has been stolen from them.”

Out in the middle of Kansas, farmer Dunn said he doesn’t plan on completely abandoning the commodities market he just wants the system to work.

That way, “I don’t have to worry about everyday are the markets up or down,” Dunn said. “Once I know I’ve reached a point of profitability I can go about doing what I do best and that’s growing crops and cattle.”

By mid-December, Dunn had recovered most of the $30,000 that went missing from his account. He was still waiting on about $9,000 and it was not clear if he’s going to get it.

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