Farmers are the bedrock of the agricultural commodities markets – after all, they make the products that are traded there.
But after the October bankruptcy of commodity trading firm MF Global and more recent allegations of shady dealings at Iowa futures firm Peregrine Financial, the bedrock is shaking.
That’s why CME Group, which owns the Chicago Board of Trade and the Chicago Mercantile Exchange, is working hard to regain farmers’ trust.
“It is super important,” said Bryan Durkin, chief operating officer of CME Group. “It is a mission on the part of the CME Group to make sure that we are directly reaching out to this very important segment of this business and this global marketplace.”
Nestled among the skyscrapers of the Windy City, the Chicago Board of Trade and CME Group offices are both literally and figuratively a long way from the fields. But without farmers, these markets wouldn’t have anything to trade.
That’s why executives from the multibillion-dollar company have been meeting with farmers across the country in the early part of this year.
“I, myself, have spent a great deal of my time out in the field meeting with those customers that were directly affected from these unfortunate events,” Durkin said.
It’s a tough row to hoe, especially with the skepticism many farmers feel. Daryl Larson – who runs a small cow-calf operation and farms about 1,600 acres of wheat, corn, soybeans, oats and milo in McPherson, Kan., had doubts about the financial system after the MF Global collapse, even before issues with Peregrine Financial.
“There’s basically three places, only, that I trust people in suits and that’s at church, weddings and funerals,” Larson said.
Back in October, futures trading firm MF Global went bankrupt and regulators discovered that about $1.6 billion of customer money had vanished. Customers still haven’t been fully repaid. This week, regulators alleged that Peregrine Financial –another futures trading firm –had falsified bank records to the tune of some $200 million.
In February, CME Group launched a program designed to back up farmers for up to $25,000 per account in the event of another MF Global-type situation. Durkin said that would have helped about 4,700 MF Global account holders.
The fund will protect up to $100 million of farmers’ accounts. Of course, the MF Global bankruptcy revealed a shortfall in the billions.
Farmers and ranchers caught up in the Peregrine Financial bankruptcy, CME Group said, are eligible to apply for money from the fund. Details on applying for the fund can be found on the CME Group website.
It’s not as if the commodity markets ground to a standstill over farmers’ distrust, they’re still functioning well.
Many farmers are advocating, though, for more regulation of the industry and stricter financial reporting rules. They want to continue to use the markets, even if some of their faith was shaken.
Durkin said his company is committed to proving itself.
“We want to make sure that the protocols and the procedures are in place that continue to restore their confidence in the industry itself,” Durkin said.
The Peregrine Financial bankruptcy, however, can only erase some of the goodwill the industry had earned since MF Global. That, CME Group spokeswoman Laurie Bischel said in an email, has only made the industry more resolved to win back trust.
“We will continue to work closely with the (Commodities Futures Trading Commission), the (National Futures Association), the (Futures Industry Association) and market participants to find solutions that will strengthen protections for and restore the confidence of customers who use derivatives markets to manage their global risk,” Bischel said.
The National Futures Association is the self-regulatory organization for the futures industry. Any firm or individual that conducts business on the futures exchanges has to be registered with the NFA. Larry Dyekman, the organization’s director of communications and education, says it’s working with CME Group to mandate more transparency for trading firms.
“NFA and the CME Group formed a special committee back in January to look at ways we can strengthen our regulations, strengthen our policies and procedures,” Dyekman said.
They’re working to institute tougher reporting requirements. Critics, though, say the industry shouldn’t be self-regulated at all, there should be stronger oversight of everyone involved. In fact, the role of regulators is expected to come under scrutiny in a Senate hearing next month.
For now, the industry is left to deal with troubled farmers. After all, farmers who doubt the security of their money will stay away from the markets.
“It’s totally understandable that they would have these frustrations,” Dyekman said. “It’s like being burned and you know, you don’t want to get near the flame again.”
For his part, farmer Daryl Larson maintains the process of regaining trust is pretty simple.
“I mean, if they want us to trust them then they’ve got to live by the golden rule and they’ve got to quit screwing us over when they get a chance to do it,” Larson said.
Clearly, Larson is not the biggest fan of the financial industry. Still, he doesn’t see much choice and uses the markets in select situations.
Larson has taken to using his local co-op to help him place bets on the markets. It takes out some of the risk, he said, some of the worry. He knows the people he’s working with and he can meet them face-to-face.
Larson’s family has farmed in McPherson for four generations and he’s not looking to lose the farm any time soon. He wants to trust the markets and he wants to take some of the risk out of his work. But it’s a gradual process.
“We need to be able to turn our backs on people and not be afraid they’re going to stab us. Just plain and simple,” Larson said.
Farmers know that growing trust, like anything else, is hard. That’s a lesson the commodities markets are learning too.