MF Global Bankruptcy Will Have Repercussions for Grain Markets

Farm Progress market analyst says this is the first U.S. casualty of European sovereign debt, but won't be the last.

Published on: Nov 16, 2011

MF Global filed for bankruptcy on Oct. 31 after unsuccessfully attempting to sell assets the prior weekend. This is the seventh largest bankruptcy filing in U.S. history has and will continue to impact grain markets Farm Progress Market Analyst Arlan Suderman says that MF Global could be considered the first U.S. casualty of the European sovereign debt situation.

According to reports, MF Global had taken on some European sovereign debt through the purchase of European bonds. The recent bailout deal that European leaders came up with required bond holders to take a 50% "haircut," losing half the value of the bonds.

"From that standpoint as I understand it, MF Global took a huge hit," Suderman said. "As they did so credit rating agencies began to lower their credit ratings. As that happened customers started pulling out their money and essentially it was like a run on the bank and suddenly MF Global's financial health deteriorated rapidly within a matter of days."

As MF Global tried to sell assets to raise cash apparently there were some inconsistencies that made potential buyers pull back from purchasing portions of the company. Reportedly MF Global admitted they had comingled client money with their own. At that point many of the major trade exchanges froze all action by MF Global and froze firms that brokered and cleared through MF Global from their trading floors until they could figure out where the money was and how clients could be protected.

At the Chicago Board of Trade 30% to 40% of all the traders have cleared through MF Global, 33 trading firms cleared through MF Global and the majority of trade at the Kansas City Board of Trade also cleared through MF Global.

"So they were essentially locked out of trading," Suderman said. "They had positions on that were vulnerable because the market kept moving, they were unable to get out of their positions until they were able to get their accounts transferred to other brokerage firms. So when you have a lack of those trading firms and traders involved in the market you have a sharp drop in trade volume that can create some very erratic trade and creates a lot of uncertainty."

That uncertainty creates volatility in both the futures markets and the local cash prices at country elevators. If a farmer's local grain buyer cleared through MF Global, it is going to handcuff that buyer in his ability to be competitive in the cash market until his accounts have been transferred to other brokerage firms.

"This was the first casualty of the European sovereign debt crisis; there will be other casualties," Suderman said. "They may not affect the grain market as directly as what MF Global's fall did, but they will have a similar impact on market psychology and the confidence of the market."

Suderman says that until the European debt crisis has been solved there will be continued volatility and price swings in the market.