The shock waves from the collapse of commodities trading firm MF Global Inc. are hitting hard across rural America, where farmers, ranchers and agricultural business owners are nervously waiting to learn how much money they've lost.
Many of the farmers who traded with MF Global, which is being investigated over what federal regulators say is an estimated $1.2 billion that may be missing from customer accounts, used the futures markets to reduce the risks of volatile prices. Locking in prices through the futures market — something farmers have been doing for a century — allows them to plan ahead while knowing what their costs will be.
Mike Mouw, co-owner of Mouw's Feed and Grain Inc. in the southwestern Minnesota town of Leota, said his business relies on the futures markets both when it buys grain from farmers and when it sells feed to hog producers. That makes it possible for the company to plan two or three years ahead. Now, though, Mouw estimates he's out about $250,000.
"I'm praying that I get it back," he said.
Farmers, ranchers and rural businesses such as grain elevators and feed mills were among the hardest hit when they were cut off from the cash in their hedging accounts at MF Global, which sought bankruptcy protection in October after making a disastrous bet on European government debt. The number of people harmed and the extent of their losses isn't clear yet.
"This thing should not be taken lightly by anybody," Mouw said. "This has a far greater trickle-down than people realize."
Federal regulators are investigating whether MF Global, as its financial condition worsened, tapped client funds that were supposed to be kept safe in strictly segregated accounts. They're also trying to determine what became of the money — it's not clear if the cash is parked somewhere or if it's gone. Violating the rules for segregated accounts can lead to civil and criminal penalties.
Dean Tofteland, who raises corn, soybeans and pigs near Luverne in southwestern Minnesota, has about $200,000 tied up with MF Global, said Sen. Amy Klobuchar at an Senate Agriculture Committee hearing. She said his situation shows how the firm's $6.3 billion bad bet on European bonds is being felt in small towns across America.
Klobuchar, a Minnesota Democrat, said afterward that recovering two-thirds of the funds "clearly isn't good enough" for farmers threatened with deep losses to their life savings.
Tofteland said in an interview that he never imagined money that belongs to him would just disappear.
"It's like having your house burn down without insurance," Tofteland said.
Grain farmer and rancher Marty Klinker of Fairfield, Montana, has lost about $336,000, said Sen. Max Baucus, a Montana Democrat. Baucus said Klinker got about 60 percent of his money at MF Global back, but his prospects for the rest seem pretty grim.
He told CFTC Chairman Gary Gensler that Klinker trusted the system, and it let him down.
"You're absolutely right, the system has to work for the farmers and ranchers and the energy companies and all of the people that need to lock in a price, and segregation is at the absolute core of this system that's been existent for decades," Gensler said.
But the chairman did not venture a guess about when, if, or how much of Klinker's remaining money — or anyone else's — might be returned.
Agricultural prices frequently fluctuate due to ever-changing supply and demand, which are driven by many factors ranging from the weather to exports. Trading on the futures markets helps farmers shield themselves from the risks of prices for their products falling and costs for things such as feed increasing.
Hog producers who rode out tough years in 2008 and 2009 came to rely heavily on risk management tools and were starting to lock in some pretty good profits before MF Global collapsed, said Mark Greenwood, a senior vice president and swine expert at AgStar Financial Services, which serves farmers mainly in Minnesota and Wisconsin.
Greenwood estimates that about half of the hog producers his company serves have been affected, with combined losses probably totaling more than $40 million. The 300 to 400 clients have individual losses of $50,000 to over $1 million, he said.
They're wondering if they can trust the futures trading system again — whether there are sufficient guarantees to ensure that another MF Global doesn't happen, Greenwood said.
"They're frustrated, angry," Greenwood said. "I think the word is disgusted. We're trying to do everything we can to manage a very volatile industry. This was one risk we never thought we'd see."
Preserving confidence in the system is essential, because farmers who don't trust traditional risk management tools might end up taking on even greater risks, said Scott Cordes, president of Country Hedging Inc., an MF Global competitor that is a subsidiary of CHS Inc., the nation's largest farmer-owned cooperative.
"At the end of the day it gets down to, who do you know and who do you trust?" Cordes said.