MF Global Bankruptcy Affects Agriculture

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Farming is a business that involves a certain amount of risk, whether it be weather risk, disease risk, financial risk, marketing risk, etc., and most farm operators have developed strategies to manage those risks. One of the strategies that is used to manage grain and livestock marketing risk is to lock-in a profitable price for the grain or livestock that is being produced, using forward contracts or price “hedging” positions. One risk that farmers have never worried about is that the so-called segregated funds that they have in a grain or livestock hedging account would somehow be at risk. This all changed on Oct. 31, 2011, when a company called MF Global Financial filed for bankruptcy.

The grain and livestock futures transactions that are handled by commodity brokers for customers are usually processed through clearing houses, which also maintain margin accounts. These margin accounts are placed into segregated funds, which means there are very strict regulations on how these funds can be used by the firms that are managing them in order to protect the integrity of the margin accounts. MF Global was one of the major clearing houses for grain and livestock futures trading until Oct. 31, 2011, when the firm filed for Chapter 11 bankruptcy.

According to the Congressional Research Service (CRS), MF Global had about 50,000 futures customers, and about two-thirds of those customers had futures positions and margin accounts that were affected when the company filed for bankruptcy. It was estimated that approximately $1.2 billion of customer funds were still tied up as of mid-February, and return of those funds is still very much in limbo, pending further bankruptcy court action and fund availability. This has resulted in losses of several thousands of dollars for many producers and ag businesses, and even millions of dollars for some grain elevators and ag processors.

It is not known what laws, if any, were broken by MF Global, or what happened to all the funds that were supposedly in the segregated accounts for margin funds. Several Congressional hearings were held late in 2011, and there has been considerable speculation regarding potential misuse of those funds and possible violations. The Commodity Futures Trading Commission (CFTC) oversees firms and companies that are involved in commodity futures trading. There are already many laws on the books that affect futures trading, margin accounts, etc., which are enforced by the CFTC. It is also not clear of how much, if any, of the remaining millions of dollars owed to farm operators and ag businesses will be repaid, or when repayment might occur.

 

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