MF Global's cost to farmers appears large

WASHINGTON - The cost of the scandal at MF Global is becoming clearer to farmers and grain elevator operators across the Midwest, and it could be huge.

A court-appointed trustee testified last week that he has found enough money within the company to pay back roughly 72 percent of missing funds over the next several weeks and may find another 3 cents on the dollar. But trustee James Giddens said generating enough cash to fully cover the entire $1.2 billion taken from customer accounts will be a challenge.

If that turns out to be accurate, agricultural interests in Minnesota and other states whose commodity trades involved MF Global could be out hundreds of millions of dollars. "It's like putting money in the bank, and someone stole it," said Bob Zelenka, executive director of the Minnesota Grain and Feed Association (MGFA).

Federal investigators are looking to see if the money was illegally transferred from supposedly segregated customer accounts to broker-dealer accounts as MF Global's business collapsed into the nation's eighth-largest bankruptcy.

Giddens testified at a hearing of the Senate Agriculture Committee that the shortfall likely is "significant." Among other problems, MF Global assets deposited in foreign countries could be hard, if not impossible to get back.

"While I will pursue them vigorously," Giddens said, "experience dictates that recovery of these foreign assets may be more uncertain and may take more time."

"There is," he concluded, "no assurance of a 100 percent return."

Huge trade volume

Losing roughly a quarter of every dollar held in MF Global accounts could produce millions of dollars in losses for individual grain elevator companies such as WFS, a farmer-owned cooperative in southern Minnesota.

WFS serves 4,000 customers and had $565 million in sales in fiscal year 2011. The co-op handles 65 million bushels of produce a year and takes options or futures positions on virtually all of those bushels.

Commodities experts say a conservative figure for futures and options trades on 65 million bushels of produce could run around $16 million to $18 million in a year.

WFS Chief Executive Todd Ludwig declined to disclose the dollar volume of the co-op's hedges. Nor would he say exactly how much money remains unrecovered from MF Global accounts. Ludwig called the amount "substantial."

"It is significant dollars, but not significant enough to put the business at risk," Ludwig said. "I can't talk freely about numbers because of some litigation that's going to go on around this."

Minnesota has about 350 grain elevator companies, the MGFA's Zelenka said. Not all of them used MF Global to clear trades, but many did, as did hundreds of produce and livestock farmers. WFS is among the state's largest grain elevator operators. Regardless of size, most grain elevators do business the same way: They pay farmers cash for commodities and take a hedge position to reduce the risk of falling prices.

No one knows the exact amount of money state grain elevators and farmers have yet to recover from MF Global accounts.

"People don't like to talk about it," Zelenka said. "It's in the millions for Minnesota alone. Is it $5 million or $10 million? I don't know."

What Zelenka does know is that the "general mood" among grain and feed association members is that they will not recover all of their money.

The losses probably will not put anyone out of business, Zelenka said. But every dollar that doesn't get returned feels like it was lost to thieves.

Waiting for payment

This impression filters down to farmers and commodity brokers.

Keith Sorensen, a principal in Sorensen Yaggie Commodity Consultants, advises dozens of farmers who cleared options and futures trades through MF Global. Initially, Sorensen said, those customers had about $6 million in accounts that they could not access. They have since received back about $3.6 million of that amount.

They now await money from a distribution approved Dec. 9 by the bankruptcy judge that will get them up to 72 cents on the dollar. Even then, Sorensen's clients are still out $1.68 million.

"Someone needs to make them whole," said Sorensen, noting that a two-cent fee on every commodities trade is supposed to go to a fund that might be tapped to cut the losses of MF Global customers whose segregated accounts were raided.

Sorensen, who works out of Nisswa, also directs his clients to claims forms they can fill out and file with the bankruptcy trustees. However, full payments of claims are not guaranteed either.

Meanwhile, creditors of MF Global have argued against any disbursements of assets to customers with segregated accounts because it hurts creditors' chances of collecting what MF Global owes them.

Recent federal regulatory action will restrict future brokerage investments of segregated customer accounts. Criminal charges may be coming, and civil lawsuits are a certainty. But for those who might never get their money back, a sense of futility endures.

"It's too little, too late," Sorensen said. "The fox already went into the henhouse and ate the chickens."

Jim Spencer • 202-408-2752