MF Global collapse leaves farmers with losses
The reported collapse of the large commodities trading company, MF Global, Inc., has stuck many farmers and farm companies with possible losses. It's also raised questions about whether the heated grain markets of the past three years have created a bubble waiting to burst.
According to The Associated Press, federal investigators say up to $1.2 billion might be missing from MF Global's customer accounts and many of the customers are farmers and grain elevators.
Members of Congress are looking into it.
Mike Mouw, co-owner of Mouw's Feed and Grain Inc. in Leota, Minn., said last week he's lost maybe $250,000 through his hedging to lower his risk in buying grain from farmers and selling feed to hog producers. Other farmers in Minnesota and Montana also stand to lose hundreds of thousands, AP reported.
Steve Strege, executive vice president of the North Dakota Grain Dealers Association, told the Herald on Sunday he hasn't heard much concern from his members who represent most of the roughly 395 grain elevators in the state that handle about 700 million bushels of grain a year.
"I talked to one of the lenders who works with a lot of elevators," Strege said. "He said 10 percent of their customers or less (nationwide) have been involved with MF Global, and in North Dakota it's less."
"But it's a serious issue for anyone who is involved," Strege said, because of the amounts of money traded.
In fact, the National Grain and Feed Association built a special website to address its members concerns, including contacts for attorneys.
MF Global filed for bankruptcy this fall and federal investigators are checking to see if MF Global, as it began failing financially, tapped into customer accounts to tide it over. It's not clear where all the money has gone and how much still can be recovered. A federal trustee has been put in charge of looking for it.
"I don't think it is as big in North Dakota (as in Minnesota and other states)," said Paul Coppin, general manager of Reynolds (N.D.) United Coop. "People really aren't talking about it very much and ones who might be involved aren't talking."
Elevator managers such as Coppin, and many farmers, "hedge" their grain buying and selling, reducing their risk by making mirror trades in the futures and options markets to protect themselves against price movements against their positions.
Coppin didn't deal with MF Global.
"We do our (commodity trading) with Country Hedging out of Minneapolis," he said.
That firm is part of CHS, the giant agricultural firm based in St. Paul that first was known as Farmers Union decades ago.
"It just goes to show, you need to know who you trade with," Coppin said.
High grain and livestock prices the past four years, combined with the big downturns on Wall Street and in the real estate market pushed and pulled lots of new money into commodity trading, Coppin said.
That offered more opportunity, more liquidity and supported grain prices, but it also increased the risk and made all the trading more complicated and obscure, he said.
"You didn't always know where your money was," Coppin said.
"What we are seeing right now is grain is trading much faster," Coppin said. "It's all done on the internet, so you can make a big trade without having contact with anybody at all. It's become very impersonal and very much more volatile because of that."
In his three decades in the industry, Coppin has never seen grain prices this high this long. It's not just wheat or corn, but every crop grown in the state is at or near historic highs, from sunflowers to dry edible beans to barley and canola.
For example, spring wheat prices received by North Dakota farmers averaged $3.59 a bushel from 2001-2006, according to the U.S. Department of Agriculture's ag statistics office in Fargo. From 2007 through 2010, spring wheat prices averaged $6.56, an increase of 83 percent.
This year, the monthly average price received for spring wheat by the state's farmers has gone from $8.29 in February steadily upward to near $10 by mid-summer. Last month, it averaged $8.95 a bushel, up from $8.09 in October and $6.45 in November 2010.
Meanwhile, corn prices received by North Dakota farmers averaged about $2 per bushel from 2001-2006, but have been $5 to $6 a bushel this year.
"Ten years ago, if corn went up a nickel a day, that was a big day," Coppin said. "Now it's a very slow day and it moves 15, 20, 30 cents a day."
It's led to companies and investors who never had been into agriculture jumping into wheat, corn and soybean trading in the past two to three years.
That means MF Global's troubles may be a harbinger, Coppin said.
"We are going to see things happen like this more and more. The grain trade is looking at this very seriously. If I make a trade with a commodity trading company, I have to know the funds I put in there are protected and ear-tagged for me. But how do you watch-dog that? That's a problem."
Like the derivative problems on Wall Street, all the money in farm commodities has produced some new and questionable ideas, Coppin said.
"It's getting to the point, if you want to hedge, you can hedge about anything. They are starting to talk about weather futures."