MF Global Scandal Could Hasten Vertical Integration in Agriculture


by Eric Nelson

For grain and livestock producers without some kind of marketing agreement with a packer or end user, the CME Group in Chicago offers alternatives for producers to hedge their production, without signing marketing agreements that give the power of supply control to the packer or end user. These agreements work as a relief valve in times of market supply shortages and allow end users to call in “contract commodities”, versus having to bid in the open market for supply to fill their daily needs. These captive supplies, if pooled in large enough numbers, can allow processors to stay out of cash markets for several weeks in a row, causing sizeable breaks in underlying cash prices. Some producers are willing to enter into such agreements in return for price risk control which helps protect their bottom lines, without having to use futures and options markets directly. Futures and options are often seen by producers (and their bankers) as risky endeavors, with clearing firms sometimes managed by folks of less than sparkling character (as was seen with MF Global). Swashbuckling speculators have given bad names to these markets by their reckless use of them inattempts to make large sums of money quickly.

In practice, futures and options are a very effective means of protecting a producer from price risk, without giving up control of inventory and the negative price affects of captive supply. I (along with many other independent producers) use futures and options markets to protect prices or the cattle I raise and feed and until last fall MF Global was the clearing firm I used. Through acquisitions over the years, MF Global acquired many independent Midwestern livestock and grain producers and farmers as clients, and I was one of them. I was fortunate to have had only few hundred dollars in my account that was at risk, as I know others that had tens and hundreds thousands of dollars in harm’s way. I couldn’t believe the CFTC’s initial response to the MF Global crisis, with them basically saying “they have nothing to do with such matters!” Furthermore, I couldn’t believe the slow response time from our elected representatives to this whole situation, particularly with the negative impact on so many, especially many Midwestern farmers and livestock producers.

After the financial meltdown in 2008, many of those affected were bailed out and the response was immediate. Contrast that with the MF Global melt down, where the response from government has been slow and muted, bordering on nonexistent. To many watching this whole MF Global situation, it might appear that the whole commodity futures industry is unregulated. That appearance has likely caused numerous producers (and their bankers), hurt by MF Global, to not only quit trading futures and options, but has also made them more likely to enter into price damaging marketing agreements. Although I don’t believe the MF Global situation was hastened by any entity with its eyes on increasing its control over the markets for raw materials, I do believe the whole situation involving MF Global has likely driven more independent producers of agricultural products into the waiting arms of the integration minded end user (and their marketing agreements), at the expense of those independent producers remaining.

Commodity trading firms must be adequately regulated so that unsuspecting producers are protected from criminal acts by those running the trading firms. Penalties should be stiff and justice must be swift with regard to the MF Global case (and in the future)so that the commodities futures trading industry is not further marginalized and increasingly distrusted by those who depend on it most, independent producers. EN