Just when we had become accustomed to the volatility in the pork industry, we were thrown a big curve we didn’t see coming. MF Global filed for bankruptcy on Oct. 31, and the fallout has been real for those producers who utilized MF for their clearing services.
In the first week after bankruptcy, the assigned trustee moved to quickly transfer customers’ positions to new clearing firms, and through that transaction, the equity in those accounts should have transferred as well. As customers of MF Global now fully understand, those equity funds, which were legally supposed to be segregated from other funds, were not. Just prior to MF’s bankruptcy filing, some of those funds were moved to other accounts.
Federal hearings have played out before both the House and Senate agriculture committees in an attempt to find out what really occurred and who’s responsible for what. Meanwhile, the real-world question is, what does this mean going forward?
The immediate effect of this bankruptcy on MF’s clients is that they were short a portion of the equity in their accounts, and they had to re-margin the missing amount with their new clearing house. Another immediate impact, which affected some clients more than others, is that none of the excess cash in their accounts was transferred. It remains to be seen how or if these missing funds will be located. Most producers will need to go through the claims process and attempt to retrieve funds through the bankruptcy proceedings.
You might ask, if the funds were legally supposed to be segregated shouldn’t someone have been watching these accounts?
The CME Group and Commodity Futures Trading Commission actually audit these segregated accounts on a regular basis, and that did occur on the Wednesday prior to MF Global filing bankruptcy. The funds were identified as segregated at that point. But by Monday, Oct. 31, they were not.
Needless to say, it will be interesting to see how the legal aspect of this works out and who may be responsible for the shortfall occurring.
So now we know that we may have to take a loss on some of these positions, but how do we once again become comfortable using the futures market?
It was good to see the CME guarantee some of the funds and a good portion of any shortfall that may occur if the trustee were to over-distribute the remaining available funds. This has probably helped the trustee expedite the process of returning funds, but in the long term, we will all want to see the oversight of segregated accounts improve. For now, we as producers and industry representatives need to be involved in the process and practice our due diligence when picking a clearing house.
On a much better note, we have seen pork production margins return to near-record levels, as I write this article in early December. The 12-month outlook looks great, with margins for the average producer calculating out to around $25 per pig. Remember, this will vary depending on your cost of production, what your wean pig costs are and whether or not you produce your own inputs. However, 2012 is looking like it could be a very good year. So why not lock in some of those profits?
We at AgStar have seen many of our clients lock up the crush margin on much of the first half of 2012 and some of the second half. It’s interesting to note that when looking at seasonal trends, we’ve had this great opportunity to lock in margins around Thanksgiving many times in past years. But it never seems to last longer than a few weeks.
Have you looked at your margins and determined if it makes sense for you to lock some down?
All in all, 2011 has been a very good year for pork producers, and although continued market volatility will require you to manage margins, prospects look good for 2012. The concern will be how much expansion we could see in 2012 and whether we can hold onto the large export increases we’ve gained. Both are good reasons to take a disciplined approach to managing your risk.
Editor’s note: Be sure to check out the AgStar swine team’s weekly “Hog Blog” at AgStar.com for a discussion on current markets and industry news.