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.

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