November 21, 2011

6 Min Read
MF Global Collapse Not on the Radar

Most of you, as producers, have heard or been affected by the MF Global Holdings, Ltd. bankruptcy. For any producer or brokerage firm who used MF Global as its clearinghouse, the last couple weeks have been a nightmare. Many of us remain in a state of disbelief. MF Global filed bankruptcy on Oct. 31, 2011, and over the course of the next week, there was a series of emails and news stories all trying to dissect what was going to happen. Producers’ excess cash, not their entire initial margin, was at risk. We have a fair amount of producers who were affected by this bankruptcy, so we received many phone calls with clients to discuss options. In addition, we held several internal meetings to conduct scenario planning and to determine how much margin money was needed to fully fund accounts that were being transferred. It was a long week for producers and a long week for many team members at AgStar. Clients have often expressed their disbelief and feelings of disgust about the bankruptcy. I can empathize with producers because this risk was not on our radar screen. As the events unfolded, producers’ initial margins were almost fully funded and the shortfall was not as extreme as we once thought it might be. Unfortunately, to date, producers are still short some funds. They have managed through this situation, but three key questions remain answered: 

• Will producers get their money back? 

• How did this happen and where was the oversight? 

• What can we do to make sure this never happens again? 

The answers to these questions will be played out in the future. Hopefully, we will receive some direction soon. Many people are concerned that it could happen again. Credibility is at stake. 

As Margins Stay Strong, Approach Expansion Carefully – The pork industry has had an amazing run with prices. Cutouts this week dropped below $90/cwt., carcass. Prices have been above $90 since almost the first part of February (Figure 1). This has helped producers improve their balance sheets and it is our best estimate that the average producer, by year end, will have over 50% owner equity. It is our estimate that most producers have made back half of what they lost in 2008-2009. The very good producers are now almost as strong as what they were in 2007, with very little operating debt or maybe even cash on hand. Looking into 2012, margins are still above $20/head profit for the next 12 months. If this does play out, there will likely be some sow expansion in the United States. The key items to watch are corn prices and exports. If corn prices go higher, this will temper the thought of expansion. If exports continue to be robust – September was another great month – it will fuel some expansion (Figure 2). My concern is that producers could be thinking we can grow more production numbers and keep prices high. I remind our producer-clients, two years ago the industry was close to the brink. If exports falter, prices could drop quickly. It is difficult to build more growth in overall production with that much dependence on our current production being exported. 

Happy Thanksgiving – I want to wish all of you and your families a blessed Thanksgiving. I believe we live in the greatest country in the world and I am thankful to be able to work with people who most efficiently produce the safest food – the American farmer. 

Click to view graphs.

Mark Greenwood 
Swine Industry Consultant 
Contact Greenwood at [email protected]

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