Crooks, Hedging, Speculation, MF Global: Canada Don’t Take This Market for Granted

     I have been shut down for a week now.  Rewind a year ago and I was completing a beautiful stale seedbed on the 150-acre heavy clay field.  Fast forward a year and one of the best growing seasons I’ve ever seen and I am harvesting over 220 bushels per acre.  I cannot harvest that very quickly, because I’m always stopping to unload.  So let’s just say I was a little bit more than nervous when Hurricane Sandy showed up.  That was not part of my management equation.

I grew a little bit more nervous when I asked DTN meteorologist Bryce Anderson his opinion about the effect of the approaching hurricane on Ontario crops.  Bryce got back to me and said how devastating the storm was going to be and any crops left in the field would be gone.  With half the Ontario corn crop still in the field, including another 75 acres of mine, that was not what I wanted to hear.  So as the wind howled to epic proportions last Tuesday evening I had visions of the corn crop gone.  Thankfully, this is not 1980.  The hybrids of 2012 can withstand much more and although whipped and battered I will get a chance to harvest my corn another day.

Yes, it was a real surprise to get held up by a hurricane, something completely out of leftfield.  It is that unexpected Tuesday event you can never see coming.  Ditto, for all those other things that comes along to affect us on our farms.  I read with great interest my DTN colleague Katie Micik writing about the 1st anniversary of the MF Global bankruptcy this past week.  A year ago, that was like a hurricane to our farm risk management world as segregated customer funds went missing.  You think you have everything hedged, and then somebody takes the money in the middle of the night.  You are suddenly out hundreds to thousands to millions of dollars, just like hurricane Sandy taking all that corn away from me.

I must say the MF Global bankruptcy shook me pretty good.  Where did the money go?  As Katie documented in her report, CME auditors were at MF Global just days before the collapse and didn’t notice anything strange. A few days later, MF Global’s segregation account showed a $200 million surplus. The next day it had a $900 million deficit. Fooom, the money was gone and farmers, grain elevators and others were left holding the bag.  It was what it was, but it left many people shaking their heads.  Never discount the notion that crooks will be crooks and they exist in the free market economy just like anywhere else.
Of course I’ve always asked what about us in Canada?  Do we as an agriculture industry have anything to say about this?  Does our producer organizations have anything to say about this.  Do our collective ministers of agriculture have anything to say about this?  And, if the answer is yes, does anybody really understand it?  Or is it just me?  Maybe our futures market and its regulators are something Canadian producers take for granted, despite it being an American run show.

I do think that these issues are real for Canada and Canadian farmers but I don’t think that we should get tied in knots about.  As many of you know I speak about agricultural markets.  I try and speak about markets in a very simple way.  I do that because eyes glaze over if you get complicated, including my own.  So sometimes I think as Canadians we should just try to understand more about the issues of marketing risk and structure in the cauldron where much of it takes place at the CME in Chicago.

Let’s just say in 2012 there are still some big issues with regard to risk, money flow and confidence within our agricultural futures markets.  I have made a big issue the last few years about flat prices, especially at these elevated levels.  I still believe that, but still, somebody is hedging that risk whether that is another farmer, elevator, futures commission merchant or commodity trading advisor.  If they think they’re segregated funds might disappear, I don’t blame them for being gun shy and eventually volume will suffer and eventually farmers too.  There is not a lot Canadians can do about it, but let’s not have blinders on.  Hedging and speculation within any commodity market is risky, even without the crooks.

This past August, I toured the trading floor at the CME.  At the time, I asked should we celebrate our futures market as being the bastion of efficiency, as it looks to be.  However, I cautioned everybody because of the MF Globals of the world.  A year later, I’d ask the same question, but in essence we have the same answer.  Nothing really has changed, confidence has still not returned and not all of the money.

So in Canadian farm country, we march on.   As farmers, we talk markets all the time, in French and English.  However, everything that glitters is not necessarily gold.  Sometimes things lurk in the distance, which might rise up and bite you, just like I didn’t see Sandy two weeks ago.  Ditto for our markets.  As Canadians we should not take our market structure for granted.  Yes, crooks are everywhere and we have some government protection to help.  As our market grows more complicated, it’ll be even more important.