MF Global Bankruptcy Affects Agriculture

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Some farm operators have taken the attitude that the MF Global bankruptcy and loss of funds does not affect them, since they do not hedge grain or livestock, and have never used the commodity futures markets. However, the MF Global situation could have long-range impacts that affect every farm operator, regardless of the marketing strategies they regularly use. In fact, some farm-management experts have said that the end results of the MF Global situation could have more impact on the financial future of farm operations than the passage of the next farm bill now being debated in Congress.

Obviously, the first follow-up priority will be to restore the millions of dollars that were lost by the farm operators and ag businesses due to the bankruptcy filing by MF Global in 2011. The second priority will be to review the laws and regulations governing futures trading, along with the oversight by the CFTC, to make sure that this situation does not happen again in the future. Some members of Congress, as well as some ag groups, are likely to call for very restrictive regulations on commodity futures trading and handling of funds. While some adjustments may be necessary, there can be a tendency to over-regulate following a situation such as the MF Global bankruptcy. Some experts have suggested that there are already adequate laws on the books to protect the integrity of futures trading and the margin account funds, but that the problem lies with enforcing those laws.

Some have also suggested that future protection and laws should be implemented that involve more requirements for insurance to be purchased by commodity brokers and others that handle futures contracts. It is likely that the added cost of this insurance will be passed on to the customers, which are farm operators, grain elevators, and ag processors. The grain elevators and ag processors will likely recoup their costs by bidding lower prices for the grain and livestock that they buy from all farmers. If laws are passed that are too restrictive regarding futures trading, it could actually reduce the market alternatives that grain and livestock producers have available, thus impacting their overall profit potential.

Another potential outcome of the MF Global bankruptcy could be more restrictions by lending institutions with regards to loans for hedging accounts and futures trading. Most ag lenders have recognized grain and livestock hedging as a viable and relatively safe financial risk management tool for farm operators, and it likely is still a fairly safe tool to use. However, if either new laws or Federal examiners place significant additional restrictions on lending institutions with regards to loans for margin accounts and futures trading, it could reduce the ability of some farm operators or businesses to have adequate operating capital for grain and livestock hedge accounts, or result in higher interest rates. Again, any extra costs incurred by grain elevators or ag processors will likely be reflected in lower market prices that are offered to all farmers.

The MF Global bankruptcy situation – and follow-up actions – are far from over and could affect farm operators for years to come. In this era of high market volatility and wide ranging profitability, farmers and agri-businesses need all the financial risk management tools available to them. Hopefully, Congress, the regulators and the agriculture industry will find some workable solutions for the future.

 

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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