Producers detail impact of eighth largest bankruptcy in U.S. history
The MF Global collapse has cost Luverne, Minn., producer Dean Tofteland well into six figures and shattered his confidence in the futures markets.
On Oct. 31, MF Global filed for Chapter 1 bankruptcy and later announced that customer funds were missing. The accounts were frozen and Tofteland was unable to adjust his short positions. His hedge account was valued at $253,000 and served as collateral for his bank operating loan.
Later, Tofteland lost an additional $100,000 in equity because crop prices took a nosedive. His positions were transferred to a new broker with only 15% of the required collateral. He was informed that he needed to re-margin his hedges within 24 hours, even though he had more than three times the required margin in his MF Global account. As a result, he was forced to liquidate the hedges.
Tofteland, who raises corn, soybeans and hogs, had used the futures market throughout his 25-year farming career to transfer risk from his farm to the Chicago Board of Trade. Because his confidence has been shaken, he hasn’t used the futures market since.
"I have so far postponed my purchase of seed for 2012 because of this uncertainty," he says.
Despite the uncertainty, Tofteland believes that "in the end, we will get answers and it will make for a more efficient and confident marketplace where the customer money is safe."
Sphere of Impact. Tofteland is just one of many farmers who have been rocked by the eighth largest bankruptcy in U.S. history. His lender alone has more than 100 clients trying to get their money back.
"I consider myself fortunate," says C.J. Blew, a crop and cow-calf producer near Castleton, Kan. Unlike his fellow producers and ranchers, he did not personally have assets tied up with MF Global. "However, I have been impacted because I rely on my local cooperative to manage my risk by forward-pricing grain, and my cooperative has been impacted by the bankruptcy." Blew is chairman of Mid Kansas Coopera-tive Association and serves on the board of CHS Inc.
"My cooperative continues to deal with the aftermath of the situation," Blew says. "At the time of the bankruptcy filing, my cooperative had a significant amount of assets in segregated accounts tied up with MF Global. We now have access to positions in our hedge accounts, but only 36% of the initial margin funds needed for the transferred positions have been transferred to new accounts. There is still a significant amount of margin funds and cash not yet received," he adds.
James Giddens, trustee for the Securities Investor Protection Act Liquidation of MF Global, says his goal is to pay MF Global’s former customers 100% of the amounts in their accounts as promptly as permitted by governing regulations. "Ultimate distributions are, of course, dependent upon assets available, and there is no assurance of a 100% return," he says.
MF Global Debacle Hampers Ability to Borrow
A key to providing any type of hedging and forward contracting is the ability to finance it, said Kansas producer C.J. Blew in his testimony before the Senate Ag Committee. Although Blew did not personally have assets tied up in the MF Global bankruptcy, he relies on his cooperative to forward-price grain, and his cooperative was impacted by the bankruptcy.
"Although we have a very strong lender relationship, the MF Global bankruptcy has impacted our ability to borrow funds," added Blew, who serves on the boards of the Mid Kansas Cooperative Association and CHS Inc. "For example, it has impacted our borrowing base since the missing funds cannot be used as collateral."
There were a number of factors that led to MF Global’s demise, said Bradley Abelow, president and CEO of MF Global Holdings. First, by mid-October 2011, the market had become increasingly concerned with the firm’s exposure to European sovereign debt.
In late October, the ratings agencies rapidly and repeatedly downgraded the firm’s credit rating, and the company then reported disappointing earnings.
"The combination of events created an extremely negative perception in the market, resulting in a large number of the firm’s trading and financing counterparts pulling away from MF, which dramatically reduced the firm’s liquidity," Abelow said. "That reduction led MF Global to attempt to sell all or part of the firm to provide liquidity and protect the interests of our employees, shareholders, creditors and customers. When those efforts failed, MF Global filed for bankruptcy."