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'Experts' leave farmers holding the bag - Roy Smith

05/18/2012 @ 3:24pm

Again last week the grain markets were pummeled by outside financial markets that have almost nothing to do with agriculture. J.P. Morgan Chase, a large financial house, was apparently caught on the wrong side of a speculative trade and sustained losses amounting to roughly two billion dollars. I use the term “roughly” because it seems that no one is sure exactly how big the pain is. The individual who was supposedly in charge of that move was fired. She is said to have had 30 years of trading experience.

The connection to agriculture came from the firm liquidating profitable long positions in soybean futures to use the trading profits from that commodity to offset losses in the other markets. This subsequently caused almost limit-down prices in the soybean pit from which the prices have not yet recovered. My question is why a bank was taking speculative positions in markets in the first place? Also, why did they have a position large enough to result in two billion dollars of losses?

Sometimes commodity markets look like profit centers to those unfamiliar with know fast the risk in such markets can turn to losses for the trader, whether novice or experienced. It would seem that anyone with 30 years of experience in trading would know enough to stay out of the market or at least limit the size of position to what the firm could safely handle.  If financial losses were limited to stock holders of the bank the losses might be tolerable. However, in this case the hurt came all the way back to soybean farmers who have unsold soybeans on their farms or in their fields.

My thoughts go all the way back to the stock market crash of October 1987. In that instance an individual lost 22 million dollars from selling put options on S & P futures. That loss caused huge losses in stock prices for an extended period of time. When the dust settled the person at fault said that he never realized that selling options was so risky! So much for expert opinions.

HOLDING THE BAG

More recently the MF Global fiasco has left farmers, including me, and grain elevators holding the bag for millions of dollars that they thought were safely locked away in segregated accounts. All the time I thought that my position in the futures market was to guarantee a profitable price for my future grain sales. Silly me! I am still waiting for my check on that deal.

Most farmers hate the thought of big government having a role in regulating our activities. However, in my opinion, having comprehensive rules governing financial institutions and strictly enforcing them has to play a major part in preventing future disasters. Whether the problem is that the experts are unethical or just stupid is beyond my level of understanding.

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expert bag 05/20/2012 @ 10:51am To me the problem appears very simply you have no rule of law. If there was Mr. Corzine would behind bars. His actions were nothing less than criminal. Until the regulators are out the back pocket of the "too big too fail banks" expect more of the same.

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