Pete Bonds, a 59-year-old Texas rancher, doffed his cowboy hat and stepped to the microphone. He wanted to tell an executive from CME Group Inc. (CME), owner of the world’s largest futures market, what he thought of the $100 million fund set up to help protect ranchers and farmers from a collapse like that of commodities broker MF Global Holdings Ltd.
To Bonds and other members of the National Cattlemen’s Beef Association gathered in Nashville on Feb. 3, the protection fund that CME Chief Operating Officer Bryan Durkin was there promoting amounted to little more than a pile of chickenfeed.
All it takes is some “third-grade math,” Bonds told Durkin, to understand that given its limit of $25,000 per individual account, the fund would cover only farmers with about 1,200 feeder cattle -- a fraction of a typical rancher’s herd. More than half the cattle sold in 2010 came from feedlots with a capacity of at least 24,000 cattle, according to the U.S. Agriculture Department. Farmer cooperatives will be eligible for as much as $100,000 in the event of a brokerage failure, Bloomberg Businessweek reports in its Feb. 13 issue.
Many of the ranchers meeting in Nashville are among those still owed about $100 million after $1.2 billion of customer funds went missing when MF Global failed Oct. 31. The tension in the ballroom of the Gaylord Opryland Resort & Convention Center was a reminder that futures exchanges, first founded in Chicago before the Civil War, were meant to protect food producers from the vagaries of the market by allowing them to hedge against volatile prices -- not just to give speculators a chance to profit.
Though agricultural products make up only 11 percent of CME’s revenue, they’re still at the core of its business. The MF Global fiasco has shaken that core.
“I used to say this wasn’t some third-world country we were dealing with,” said Bonds, who has a herd of several thousand cattle in Saginaw, Texas. “But with this kind of screw-up, it seems like it might be.”
Exchange rules require brokerages to separate customer deposits from the firms’ own money. Should a brokerage become insolvent due to its own trading losses, customer accounts are supposed to remain untouched. That didn’t happen when MF Global failed, and now CME is trying to regain the trust of its oldest clients. Durkin is the highest-ranking exchange official to speak at the cattlemen’s convention in at least a decade.
“For about 150 years, farmers, ranchers, agribusiness, never worried about the safety of their money when hedging on futures exchanges,” he told the cattlemen. “This has been an industrywide blow, to say the least, to the heart of the commodities markets, to agricultural producers, processors and distributers alike.”
To pay for the new fund, which is expected to go into effect March 1, CME will take out an insurance policy to provide the $100 million in extra protection, said Chris Grams, a CME spokesman. The exchange in November established a $550 million guarantee to speed the release of MF Global customer funds. “Additional steps will be necessary,” Durkin said, explaining that the exchange is working with the futures industry to prevent another MF Global situation.
The crisis of confidence in CME comes as Standard & Poor’s lowered its long-term credit rating, partly out of concern the protection fund would “expand the firm’s long-standing mandate of guaranteeing trades.” It also hits as ranchers increasingly need to hedge. Last year saw some record-high commodity prices amid rising volatility. The price of corn, the main feed ingredient, soared to its highest annual average ever in 2011. Live-cattle futures set records seven times last month.
To manage their risk, ranchers trade corn and cattle futures. A rancher who thinks corn will be more expensive in a few months can use futures to lock in today’s price. If he thinks cattle prices have peaked, he can sell futures for livestock he plans to market later on.
The protection fund is a “great first step,” said Colin Woodall, a vice-president for government affairs for the NCBA. “Before people throw rocks at it, I think they have to realize that CME is not required to do this.”
For all their frustration, producers wary about the safety of their money have nowhere else to go if they want to use futures. CME is the “only game in town,” said Bill Rhea, 69, a feed-yard owner from Arlington, Nebraska, who used MF Global as his futures broker and said he’s out about $100,000. As for getting his money back, Rhea said: “I don’t think I’m going to hold my breath.”
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