Fallout from MF Global Far from Over

January 3, 2012

By: Greg Vincent

Confidence in commodity markets were shaken and that uneasiness will continue in 2012

Marty Klinker, a Montana farmer and rancher, went to Washington in December looking for answers. He knew he wouldn’t find the nearly $500,000 he couldn’t access when MF Global filed for bankruptcy on Halloween 2011.

Klinker’s money was only a fraction of the $7 billion that was tied up and inaccessible to the customers who cleared trades through the now-defunct brokerage giant. In mid-December, Klinker and other MF Global customers received 72% of their money. The remaining 28% remains in limbo and there is no indication of when that money will be available to them, if at all.

This is the eighth-largest bankruptcy filing in U.S. history and it has shaken the markets late this year, and that uneasiness will likely continue into 2012, says Thomas Grisafi, an independent commodity trader and CEO of Indiana Grain Co. "On a scale of 1-10, this is a 9 in terms of impact on the market. Open interest and volume have gone down since the filing and a lot of local traders have been sidelined because of this."

Furthermore, says Grisafi, anyone who has ever sold a brokerage service to somebody could always offer assurance that money in a trading account is safe. "They can’t say that anymore."

The full impact of this will be sorted out in the coming months, says Scott Harms, an analyst with Archer Financial, a division of ADM. Volume typically declines late in the year, he says, but this year it has been accentuated.

Early in 2012, he believes a lot of money will be shifted around as farmers and other hedgers move money to new brokerages. How much of that money remains in the market remains a question. Beyond the $500,000 Klinker could not access, that was his biggest concern.

In a Letter to the Editor of AgWeb, Klinker wrote: "The question the marketplace would have to ask is; ‘Do I feel confident in buying that depressed position (thus stopping the free fall) when the free fall has been caused by the lack of security on segregated accounts, causing hedgers to liquidate positions due to lack of funds? OR, should I simply get all of my money out of the market before there is a melt down and I also lose all of my money held at my FCM (futures clearing merchant)?’"

That is a concern shared by Harms. "There is no question this has caused skepticism of the markets. The safety people felt with the markets will never be there. It’s important that people are made whole with this."

On the political front, there are many unknowns now as well. Klinker attended the 2011 Farm Journal Forum in Washington, D.C. searching for what he called "a political will" to bring changes to the way FCMs handled customer accounts.

These are supposed to be segregated accounts. Unfortunately, however, ranking Democrat on the House Agriculture Committee Collin Peterson says the rules have been softened over the years that actually allow FCMs to use customer funds. At the Farm Journal Forum, Peterson vowed to get those rules reverted back to the way they were originally set up in 1968.

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COMMENTS (11 Comments)

WhyMeJake
I think the problem that the victims have is with the government, they think they should be protected from this kind of abuse. Any farmer that hears the reports on yields, carryover and the like, have to know that the government isn't there to do us any favors.

I once heard the government described as an instrument that was used to extract as much money as humanly possible from the middle class and pass it on to the rich and to the poor. Makes both Republicans and Democrats happy. There is such incredible waste and overspending, completely legal by the way, that we cannot tax our way out of the problem. And neither party wants to stop spending.

But back to the problem at hand, when you start paper trading, you are basically gambling. When the other guy holds the edge, you aren't going to win very often. Take a look at the Casinos, there is a reason they take in a lot of money. They control the odds. Those running the markets control the odds with the help of the government. Or did some of you think all those reports were to help you? I think it is the House of Representatives that can do insider trading legally, why would anyone want to give them information? Must be a reason somewhere.

So live with the fact that you might make money with futures some of the time, but not all of the time. And there can be significant losses. I was told to never risk that which you can't afford to lose. Yes, I am one of the Old-Timers. And no, I don't play games that others control the outcome on. Especially when there is no protection from the wolves. Don't let someone else have control of your money/crop.
6:13 PM Feb 7th

Faust100F
I do not like to pour salt into anyones wounds. But any prudent farmer never, never, never, let someone have control over his grain or livestock production. If anyone lost money in this fiasco, it was because they were gambling and not "True Hedgers". Like was posted earlier, you never play a game where someone else writes the rules. Next time put up some bins and keep your inventory in eye sight of your back door. In this case there were many "true hedges" and they still got screwed. Of course I am sure the hotshots at Farm Journal will support hedging crops that are yet to be grown, but most of us "old timers" learned a long time ago you do not play games when you do not know the rules. Maybe that is why we are still here and are "old timers". Sometimes education gets real expensive.
7:56 PM Jan 8th

Duan - Red Lake Falls, MN
if you really want a true market youbuy or sell the product in cash or on the futures but take or sell that product what ever position you have. you have to have the product to sell it , not on paper. or you have to take delivery of that product if you buy it even if you bought it on paper first
9:24 AM Jan 5th

PullMyFinger - Chappell, NE
Futures markets are fraud markets. Sell all your grain on the CASH MARKET ONLY unless you want to support all of the non-farming losers who make more money off of your operation than you do and can not tell whether they are looking at a handful of corn or a handful of wheat. If you play the buyers game you not only cut your own throat, you cut the throat of every other farmer who is not as stupid as you are.
10:33 AM Jan 2nd

Minnesota Farmer - Brownsdale, MN
I would think that long ago one might have decided it was not wise to play another mans game. I sit in astonishment at the number of people so weak between the ears as to believe either wall street or the various grain exchanges have any interest whatso ever in the outcome to the individual investor. It was just another transfer of wealth from the individuals to the corporations. If you all haven't noticed it happens cyclically. Trying to participate fairly in a game where the laws overseeing the entities involved are set up to allow just such a thing is seemingly neccesary but at the same time infantile in the fact that this tranfer of wealth can happen anytime. The simple fact is MF Global did nothing illegal, so write off your losses. And the next time you see a lawyer, thank them for doing such a wonderful job screwing things up so this can happen legally. They will smile as they want it this way, much easier than working for a living, just pluck it off the victims. In fact thank them twice as they will probably set a situation so this type of activity can be done correctly and legally just like it was with MF Global for you too, just pay at the window and get on with it. God Bless America, if ya cant beat em join em. Notice the senator knew right away what MF Global did was legal. He might know a lawyer or two or be one.
4:55 PM Jan 1st

dlb711 - thornton , IA
THe big story tha famrers need to know is how the brokers industry is regualted I thik most would be shocked to know how that not by state only by at first level the NFA the broker own organization and how the the proces is secretive not tansparent to the public the claimee (farmer)

Doug l Bell
Al victim of broker not following indusrty rules and the non enforcement of these viloation by the NFA
12:48 PM Dec 31st

dlb711 - thornton , IA
The way the indusrty is regualted needs to be addressed there is no transparcy in the investigation of a broker if you have a complaint of his actions your not alowed to see the brokers response to the Nfa (the regulating athority ) by claiming that that information is non plublic and your not entitled to see it ( the claiming vitim??) it appears to bea very in house protect the broker stituation i think most farmers do not know that the brokers are not regul;ated by the state only at first level by the own organization the NFA

Doug L Bell
suffered a lage loss by Broker not following industry rules and he beliees failure of the NFA to enforce said rules
12:41 PM Dec 31st

MFarmsKS - Saint John, KS
People are upset because "by law" the funds that are in those accounts are supposed to be kept completely separate from the companies other accounts. You pay a fee to use their services but they are not allowed to invest your money in other markets like a bank would. That is supposed to provide security for the traders and stability for the market. If the laws are not changed people will not invest as much money and the markets will weaken.
12:07 PM Dec 31st

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