When futures trading firm MF Global went bankrupt at the end of October, regulators discovered $1.6 billion in customer funds missing, much of it belonging to Midwest farmers and ranchers.
But MF Global clients aren’t the only ones hurting in farm country.
As the bankruptcy drags on and clients continue their efforts to claw back their funds, rural commodities brokers remain caught in the middle of uneasy markets and miles of red tape.
These small town brokers are the connection between the vital commodities markets and the farmers and ranchers that depend on the markets to help manage their risk. In the wake of the MF Global disaster, that connection has taken a huge hit.
Small towns, big problems
Tom Leffler makes his living trading commodities, but he’s no Wall Street Fat Cat. There is no Wall Street in tiny Augusta, Kan., population just under 9,000. But there is a Lakeshore Drive and that’s where Leffler and his wife Patty run their commodities trading business.
Their office is small but comfortable and they’re in a nice building. They ought to be, Leffler Commodities is in the basement of their home.
It makes for a nice commute, but it makes it impossible to separate their business with their family. When their business is threatened, it gets personal pretty quickly.
“It’s no different than a business partner taking advantage of another partner or a spouse cheating on the other spouse,” said Tom Leffler sitting in his basement office, his desk about five-feet from his wife’s. “You can forgive them, but you never forget.”
The Lefflers place trades on the commodities markets for Midwest farmers and ranchers to help them balance their risk – Tom Leffler is what’s known as an IB, an introducing broker. He works with his clients and then passes their trades to a large brokerage house like MF Global.
MF Global’s bankruptcy gave the industry more than just a black eye. It gave the commodities markets a left-right combination that had it sprawled on the mat.
The industry is still working to repair itself, according to John Roe, a partner at a brokerage firm in Chicago and a co-founder of the Commodities Customer Coalition, a non-profit group fighting for the rights of over 300 MF Global clients.
“At the end of the day I think that people are very, very concerned and I’m not sure that they’re going to be satisfied for a long time to come, that assets traded in commodity accounts are safe,” Roe said.
Market impact
With $1.6 billion in customer money up in smoke, is it any surprise agricultural commodities trading on the Chicago Mercantile Exchange dropped 12 percent in November 2011 compared to November 2010? Market-watchers don’t attribute that whole drop to MF Global, but surely it had an impact.
Plus, customers haven’t yet been made whole. After six months, the bankruptcy is dragging on and clients have only received 72 cents of every dollar they’re missing.
The long bankruptcy and lack of accountability has damaged the entire industry.
“You can’t stop somebody from robbing a bank but you can make sure that once they do rob the bank, the bank doesn’t shut down for six months and no one can access their capital,” Roe said.
Brokers across the country haven’t received a dime of the commissions MF Global owes to them – their entire commission check for the month of October. Combine that with down months in November and December when the industry was still picking up the pieces of the disaster and you get a grisly picture.
Many brokers are hurting, according to Melinda Schramm, the founder and chairman of the National Introducing Brokers Association, which represents about half of the 700 or so people who make their living as Introducing Brokers.
“For many brokers, one-quarter of last year’s income isn’t there and may never be recovered, ” Schramm said.
Brokers are being squeezed at both ends – their clients are trading less and their new trading houses want to change the agreements many brokers had when they worked with MF Global.
“Unfortunately it’s a double whammy because the business itself is down. People are hesitant to go back into the markets – they’re still hesitant,” Schramm said. “But the second part is that the brokerage business itself has changed as a result of this.”
A cascading effect
Though the Lefflers are relentlessly optimistic about their business and say business is finally ticking up, the future doesn’t look especially bright for most rural brokers.
The Lefflers have spent months trying to reassure their clients and help them navigate the complex bankruptcy proceedings. All of that time is usually spent drumming up new business.
Tom Leffler compares it to a farmer doing maintenance on his tractor.
“Instead of going out there planting your corn crop, you’re out there doing something that, well yeah, it’s productive in the long run because you’ve got to keep the farm going but you’re not planting the crop you need that you’re going to harvest this fall,” Leffler said.
The Lefflers and other rural brokers are caught in the middle of a tug-of-war they can’t control.
“It’s one of these situations which you always hear about: The big boys caused the problem. It’s the little guys that have to pick the pieces up, have to talk to everybody and explain to them what happened,” Leffler said. “Even though we didn’t have anything to do with it, we’ve got to explain it.”
As the bankruptcy continues to divvy up what’s left of MF Global’s multi-billion dollar business, rural brokers will be trying to hold on to their little piece. And like their farmer clients, the Lefflers hope to re-grow it.
