MF Global Fallout Has Montana Repercussions


by Marcia Zarley Taylor, DTN Executive Editor

CHICAGO (DTN) — Montana grain grower and rancher Marty Klinker broke his shoulder socket and possibly fractured several ribs while moving cattle by horseback last week. His doctor has prescribed major surgery and pain killers for that injury. What the Fairfield, Mont., producer can’t numb is the bruising he and other small investors and hedgers have suffered since MF Global filed for bankruptcy Oct. 31.

Klinker held almost $500,000 excess cash in his MF Global hedging accounts when the firm folded. He has not had access to a penny of those funds in the last two weeks. Worse yet, when his account with 175,000 bushels of wheat hedged on the Kansas City Board of Trade shifted to a new clearinghouse on Nov. 4, no margin funds transferred, so he started over with a fresh $108,512 margin call. For the next three days, there were no daily settlements as the margin deficit ballooned to $143,375 and his broker began prodding him to forward more cash. That wouldn’t have been necessary if his $500,000 balance had been available.

“This is me, a small farmer from Montana. Contemplate the situation of a large elevator in Montana that backs all of their hedged-to-arrive contracts (HTAs) with futures. Someone with 10 million bushels on HTA back on the Kansas City or Minneapolis exchanges and no margin money could be in deficit by $5 or $6 million. How many elevators or commodity merchants are in similar situations across the heartland?”

The grain trade has handled the shocks relatively well so far and lenders have helped fill the cash gaps. But the thought of so many under margined accounts makes Klinker feel like markets are traveling in a jumbo jet with nobody in the pilot’s seat. If a government report or other market force triggered some bullish sentiment, he worries elevators and ethanol plants could be wiped out by the margin calls and forced to liquidate their entire positions.

Last Friday, fearful that his margin exposure would continue to mount, Klinker liquidated 100,000 bu. of his hedges. He’s shown a profit on his trades, but he normally would have waited until next June to lift most of the contracts and has yet to sell his cash crop. “I could have continued my positions if I had borrowed on my line of credit, but I just didn’t want to risk it,” Klinker said.

Small traders like Klinker are largely in the dark about their positions and remain shocked that commodity accounts, unlike stock accounts, are not insured by their clearing houses or federal law. At this stage, Klinker expects to lose about 15{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} of his equity in the debacle, although regulators say it could be more or less.

“Segregated accounts are supposed to be like the trust department at a bank, with solid and impermeable walls between the trust and the bank’s operations,” Klinker said. “The bank can fall into ruin and crumble to dust, but the trust department should stand.”

Diane Klemme, a broker for Midwest grain elevators and a member of the National Grain and Feed Association’s risk management committee, agreed that Klinker’s concerns “are right but it’s important to put into context. Some folks are being hurt worse than others right now, in terms of what they can access.”

Klemme says CME Clearing has now transferred approximately 87{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} of each customer’s initial margin requirements from the accounts at MF Global to their new firm. However, those with excess cash, T-Bill holdings, etc. have larger amounts remaining at MF Global. “We have one customer who was holding $400,000 cash in his account because he considered segregated funds safer than local bankers, and he was getting close to making a farm purchase. He’s not out the entire $400,000 but can’t access any of it at this point.”

Klemme believes court motions “will start to pile up to push the trustee to start to free up most of the excess cash sitting in accounts at MF Global. If the shortfall actually is around 13{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e}, there’s no reason to hold 100{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} of clients’ excess funds.”

On Monday, CME Group announced it had verified trades on MF Global’s books at the time of the bankruptcy and unfrozen provisional accounts established at new firms, although the bankruptcy trustee has only paid out a pro-rated portion of customer funds. Some sources within the grain trade say CME is “really putting up” money to expedite settlements on segregated accounts. Still, Klinker is skeptical about an announcement by CME Group pledging $250 million in financial guarantees and $50 million in cash from CME Trust since missing funds could be tied up in legal squabbles for years before that promise would help.

“As soon as I heard MF Global was in financial trouble, I questioned my introducing broker. He assured me that the customer accounts are segregated and separate and there was no risk and no reason to transfer the money … In his 40-plus years of trading, he’s been through failures like this a handful of times and it has had no effect on individual accounts, because they are segregated and cannot be touched.

“If commodity trading rules allow a brokerage firm to invest its customers’ account balances however they want, it’s no different than allowing them to steal,” Klinker added. “Who would set up an account to hedge when you could lose all of your margin and profit with the swipe of a computer keyboard?”

Yet, excessive price volatility today necessitates that growers increasingly use futures, options or hybrid cash contracts from their elevators to lock in margins pre-harvest and even pre-planting. Farmers have to prepay for fertilizer, seed and rent sometimes more than a year ahead of their cash sales, said Klinker. What’s more, the government wants to back out of the farm support business.

At times in the past few years, Klinker has hedged 450,000 bu. on the board and on some occasions captured $300 to $400/acre profits by doing so. “We don’t have enough storage to handle a whole year’s crop. If we can’t lock in a profit margin ahead of time on the futures market or with HTAs, we risk ending up with hundreds of dollars of loss per acre come harvest. What are the lenders going to say then?” he said.

For more DTN coverage on MF Global, see DTN in-depth at


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Posted with DTN Permission by Haylie Shipp



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