MF Global's Collapse Has Ranchers Steamed

They complain that CME’s $100 million fund won’t do the job

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, 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 another collapse like commodities broker MF Global’s last October.

To Bonds and other members of the National Cattlemen’s Beef Assn. gathered in Nashville’s Gaylord Opryland Resort & Convention Center 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 Agriculture Dept. (Farmer cooperatives will be eligible for as much as $100,000 in the event of a brokerage failure.)

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 on Oct. 31. And the tension in the ballroom was a reminder that futures exchanges—the first one in Chicago was founded 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 an opportunity for profit. Though agricultural products make up only 11 percent of CME’s revenue, they’re still at the core of its business. “I used to say this wasn’t some third-world country we were dealing with,” says Bonds, who has a herd of several thousand cattle in Saginaw, Tex. “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 ranchers. “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 Mar. 1, CME will take out an insurance policy to provide the $100 million in extra protection, according to CME spokesman Chris Grams. CME in November established a $550 million guarantee to speed the release of MF Global customer funds.

The crisis of confidence in CME comes as ranchers have had an increasing need for hedges. Last year saw record-high commodity prices amid rising volatility. Live-cattle futures set new records seven times last month. The price of corn, the main ingredient in livestock feed, soared to an all-time high in 2011. 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 bring to market later on.

The protection fund is a “great first step,” says Colin Woodall, a vice-president for government affairs for the cattlemen’s association. “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,” says Bill Rhea, 69, a feed-yard owner from Arlington, Neb., who used MF Global as his futures broker and says he’s out about $100,000. As for getting his money back, Rhea says: “I don’t think I’m going to hold my breath.”


    The bottom line: A $100 million fund set up by CME to help protect against brokerage bankruptcy covers only a fraction of ranchers’ possible losses.

    Before it's here, it's on the Bloomberg Terminal.