A Grain Of Controversy Trade Contract Fights Threaten Small-Town Life In The Midwest

Corn and soybeans are thriving in another steaming Iowa summer while crop prices hover at record levels, but there are few smiles in this tiny town in the heart of grain country.

“I am concerned that this is the stuff that homicides and suicides are made of,” said William Peake, pastor of First Reformed Church of Buffalo Center, about 150 miles north of Des Moines.

Peake is talking about the fight over hedge-to-arrive contracts - risky, unregulated grain trading mechanisms that grew increasingly popular in recent years and now threaten the financial livelihood of farmers and elevators across the Midwest.

Hedge-to-arrive contracts are profitable when the price of grain drops, such as after a big harvest. But a small crop and soaring international demand have driven prices through the roof this year, making the hedge-to-arrive contracts big money losers.

In many cases, the elevators sold farmers these contracts, then hedged their own positions on futures markets and got hit with margin calls.

For small towns like Buffalo Center, the controversy is ripping apart the community, pitting neighbors against one another.

“It’s a very uncomfortable time for many people in our community,” said David Langer, pastor of First Congregational Church in Buffalo Center. “Everybody is involved one way or another. People say it’s tough to shop because you don’t want to bump into other people.”

Grain elevators long held a special place in small towns, providing both a social and financial lifeline to farmers and their families. Many are cooperatives, owned by farmers who gain shares, or dividends, in the business by selling their grain there and buying fertilizer and other supplies.

“These cooperatives are kind of a modern day extension of the old effort of barn-building, where all the neighbors would cooperate,” said Richard Updegraff, a Des Moines lawyer representing the Farmers Co-Op Elevator of Buffalo Center.

“The farmers pool their marketing abilities and power. The purpose of the cooperative is to help the farmer members to obtain a larger share of the food production dollar in this country,” Updegraff said.

But recently the relationship between the elevators and the farmers has broken down, especially as grain prices soar and hedge-to-arrive contracts become more problematic.

The situation is reminiscent of the farm debt crisis of the 1980s, when banks began foreclosing on farmers who went deep into debt to expand their farms only to be hit by falling crop and land prices.

One suicide - the hanging death of a 50-year-old Dayton-area farmer who was battling his local elevator - has been blamed on the hedge-to-arrive situation. And losses are being tallied at grain elevators across the Corn Belt, from Ohio to Nebraska.

A number of lawsuits have been filed on both sides of the issue. Six northern Iowa cooperative elevators sued 59 farmers earlier this month for a total of nearly $14 million. And many farmers earlier sued the elevators, claiming they were misled about the risks. The outcome of those trials could force farmers into bankruptcy or force elevators to close or merge with a conglomerate, breaking their ties with the community.

Area ministers are growing increasingly concerned. In small towns like Buffalo Center - population 1,000 - it is virtually impossible for feuding families to avoid each other.

“I’m sure this is going to linger like a bad cancer, and we’ve got the school year starting soon,” Peake said. “I’ve noticed some people avoiding worship.”

Peake said it’s an “odd twist of fate” that the problems come as farmers wait to harvest lush fields. This year’s crops look extremely good in northern Iowa, but farmers are uncertain if they will reap the benefits.