Newspaper article St Louis Post-Dispatch (MO)
Contracts for Corn Squeeze Elevators Farmers Reap What They Sow in Risk
You may think farmers and grain elevator operators would be overjoyed at this year's record high corn and soybean prices.
But instead of celebrations, the high prices have brought millions of dollars in losses and a number of lawsuits that threaten the existence of some farms and grain elevators throughout the Midwest.
The culprit: risky, complicated agreements, such as "hedge-to-arrive" contracts, which have left some farmers and elevators stuck with obligations to deliver grain they don't have at prices they can't afford.
Hedge-to-arrive contracts are unregulated hybrid agreements between farmers and elevators that give farmers a minimum price for their crop but don't require delivery by a set date, which makes then different from traditional contracts for future delivery of a commodity.
The federal Commodity Futures Trading Commission said last week that it is "aggressively investigating" possible fraud in such contracts and trying to determine if they are illegal futures or options transactions.
Hedge-to-arrive contracts are profitable when the price of grain drops, such as after a big harvest. But a small 1995 crop and soaring international demand have driven prices through the roof this year, making the contracts big losers.
Industry watchers estimate that about $750 million could be lost because the contracts - between individual farmers and grain elevators, or distributors - number in the thousands.
And someone will eventually have to absorb those losses, be it farmers, grain elevators or grain processors. That could mean higher prices for consumers, experts say.
"Nobody really wants to talk about them (hedge-to-arrive contracts), to be honest," says David Albin, who helps run a 4,000-acre farm and estimated that such contracts could cost his family operation more than $10,000 in profits this year.
"If the government or anybody else tries to figure out what percentage (of farmers) used them, it will be almost impossible to find out. Nobody likes to talk about their mistakes. It's a marketing mistake that hopefully we all can learn from. …