Agricultural News
MF Global Debacle- More Important in Farm Country Than the Farm Bill
Wed, 28 Dec 2011 06:04:50 CST
Kansas State University Professor Art Barnaby is calling the MF Global situation a significant development in 2011 for farmers and ranchers- stating in an paper he authored this past week that it could be more important in 2012 to the farm community than the writing of the next farm bill.
Dr. Barnaby, in his paper, says "This MF Global debacle is really a big deal, and probably more important to farmers than the Farm Bill. If the regional banks (not too big to fail) and Farm Credit system lose confidence in the marketing system and view those hedge accounts as having risk from unauthorized use, then the whole marketing chain is in trouble. Elevators need margin money to manage the price risk for stored grain."
"If the collateral and interest rates increase to cover the perceived risk in margin accounts, then elevators (grain buyers) will need to widen their margins. Bottom line, higher marketing risk means lower cash bids than otherwise would be the case. Farmers who have never used futures will be affected in the cash market if this problem is not fixed. Many farmers are very angry about the fund losses in their hedge fund accounts and have stated they will never do business with the CME again! It is a little like loss of money from one's checking account; one just doesn't expect that to happen, so these farmers have a right to be mad. However, that will not fix the problem and the grain will be hedged by the elevators and other grain buyers, so all grain farmers will be doing business indirectly with the CME."
Barnaby goes on to explain the problem and tackles the argument that some are calling for more regulations. To that call- he writes "the CEO of the CME testified they were notified on Monday, October 31 that customer funds had been transferred to broker-dealer accounts in violation of CME rules. This suggests there were regulations but people in the MF Global firm chose to ignore the rules. If true, then it is difficult to understand how more regulations will fix the problem."
You can read Art Barnaby's full paper- click here for the PDF from the K-State Ag Manager's website.
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