what do you think of this?

[Samnospam]

Most actual sales of the physical are direct transactions, do many actually deliver on a futures contract?

http://market-ticker.org/akcs-www?post=199790

The Ongoing MF Global DISASTER

A warning to those who think that this story being off the front page means it's over.

It's not.

I am getting repeated reports that farmers and other producers are turning increasingly to direct deals with the users of their products, eschewing the futures markets entirely.

These are not speculators.  These are the people who grow the corn, wheat, soybeans and other products you wish to buy in "processed" form. 

This is exactly what I warned might happen, and it appears that it is.

It is an extremely dangerous trend for consumer price stability and in fact for the stability of our nation's economy in general.

Futures markets in various forms are not new constructs.  They literally date to the East India Tea Company with spice contracts.  They are necessary lubricants for price stability and the even functioning of markets. 

Some very ordinary transactions that we have all become accustomed to are at risk of disappearing entirely.  Among them are airline tickets at a known price for travel six months from now.  Reasonably-stable prices for a box of cereal are another example (corn has traded from 572 to 799 in the last year; a forty percent range over the last 12 months; soy and wheat have seen similar moves); indeed, virtually every food item in your store, from orange juice to bacon (pork bellies) is hedged off in these markets!

The move to direct transactions means that the reasonable stability we have enjoyed in these transactions, or even the ability to enter into them at all over a horizon of more than a month or two, is at risk of disappearing!

I warned when this story first broke that the danger was much more severe than being reported and that in fact the financial media was downplaying the importance of this fiasco.  It was (and is) my expectation that if there is another event of this sort the entire futures market structure for hedging these prices would be likely to collapse. 

But now the cracks are becoming evident around the edges anyway.

The producers don't have to put up with this crap and they are beginning to vote with their feet.

The unwillingness of the government, from Obama and Eric Holder on down, to demand that these funds be returned to the segregated client accounts immediately irrespective of who holds them and irrespective of how, with sorting out who goes to prison for the actions behind their loss, if anyone, at a later date is a failure that the markets appear to be taking very poorly.

If you think this story is "over" because it's no longer front-page news, you're wrong.  Keep your ear to the ground on this one -- it is rather likely that more unpleasant surprises are going to be forthcoming in this sad saga.

[bruce MN]

I can't recall anybody here saying any different..we all seemed to agree that it was serious as hell and most took it to be.  Until the thumpers made it all about Ann Barnhart and her hotline to Jehovah.

Found this gem, reading down in the comments to the piece from someone who seems fairly well informed as to how the world works:

themortgagedude

I think this is probably what is happening. The HUGE corporate farms are cutting deals with end users and not using the futures markets. But family farmers (probably average of about 600 acres) do not have the ability to do this. They are either going to continue to hedge their crops with futures or assume the price risk themselves. The average family farmer is probably age 58 or so, has some college, was raised on the farm. He/she has some knowledge of the computer (he can get on the interwebs), votes Republican overwhelmingly, is sitting on a pile of cash, etc.

What I foresee is companies like ADM taking over the game from CME. Maybe this is what you are talking about. Instead of hedging with CME you will have a contract to deliver 30,000 bushels of grain at 8 dollars a bushel in May, 2012. This grain may very well be delivered in October at harvest and stored at the ADM facility. This same farmer may have been hedging his price on the CME and storing it on the farm in the past. This contracting of price with the grain merchant has gone on forever, but I anticipate it growing in popularity again.

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themortgagedude - The man who is constantly 1.6 million miles ahead of Karl Denninger.

[BA Deere]

I think it would take ice water in your veins to sign a grain contract after MFG.  Because let`s say you contract for a insanely good price for fall delivery and they go bankrupt, some stupid judge could write down your price to "fair market value" just like what happened to Celente.

[GoredHusker]

Isn't this what happened when Verasun filed bankruptcy?  I read somewhere where a lot of 7+ buck corn got wrote down into the 3's.  This is something that's always been there.  I don't see how MFG all of a sudden should cause concern.

[bruce MN]

It's been fairly well presumed that even if you got money back right away, as a percentage of your margin account or such, that if the court rules for the company's investors it's not a foregone conclusion that they won't be able to come after you for it.  With the court on their side.

[BA Deere]

I think the difference was Versun had private contracts, not on the CME.  See, even when Refco went belly up the customers were made whole, so with the way MFG was handled we`re in deep space 9.

[r3020]

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@GoredHusker wrote:

Isn't this what happened when Verasun filed bankruptcy?  I read somewhere where a lot of 7+ buck corn got wrote down into the 3's.  This is something that's always been there.  I don't see how MFG all of a sudden should cause concern.

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That's always been the case when a grain elevator filed for bankruptcy. MF global took customers money and used it to cover their own bets. The paper traders have killed the golden goose. They are nothing without other people's money. We hold the goods. We are in control. We might have to change the way we operate but will survive with out them, the paper traders. They can not say the same about us. How long does a crooked card game survive after they have been exposed?

[r3020]

Barnhart is not the problem. She has defined problem better than anyone else. She has the integrity to live by her beliefs with out trying to quailify them or hide who she is. I guess to the progressives that is a threat.