Ag Contracts Probed By Commission Cftc Looks For Signs Of Fraud In Deals For Grain Storage
The Commodity Futures Trading Commission is “aggressively investigating” possible fraud in contracts between farmers and grain storage elevators that have left the elevators facing huge potential losses, the head of the regulatory agency said Wednesday.
John Tull, CFTC acting chairman, told the Senate Agriculture Committee that the agency is trying to determine if so-called hedge-to-arrive contracts are illegal futures or options transactions. It also is trying to decide whether the people who designed such contracts should be registered with the federal regulators.
At stake 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.
A futures contract, for example, requires the seller to deliver a set amount of a standard quality of a commodity, such as corn or soybeans, at a specific date. An options contract gives the holder the right, but not the obligation, to buy or sell a commodity at a set date.
The CFTC regulates the nation’s futures and options exchanges.
The agency is examining “whether some participants may have committed fraud in the marketing of hedge-to-arrive contracts,” Tull told the committee. He said the possibility of other violations also is being investigated.
Hedge-to-arrive contracts have been used by many farmers to control the risk of losses when grain prices fall. In past years, grain didn’t change hands and elevators rolled over the agreement. Farmers then sold their corn and soybeans when they needed cash or when market conditions were more favorable.
But because of supply shortages, prices have been rising sharply since last summer on grain markets and many farmers have sold their grain.
As a result, some farmers have promised elevators more crop than they can deliver, at lower prices than current levels, and elevators have been socked with increasing fees from the futures markets on promises to deliver grain they don’t even hold.
The size of the potential losses is unknown. But grain cooperatives in several Midwestern states are feeling the pinch.
At least five lawsuits seeking millions of dollars in damages for hedge-to-arrive contracts gone sour have been filed in federal court in Chicago. The lawsuits accuse market advisory services and grain elevators of enticing farmers to sign such contracts without explaining the risks involved.
On May 15, the CFTC issued an advisory to farmers and grain elevator operators about such contracts. The advisory said future agreements should bear some relation to what a grower can deliver, and prices should be based on prices in the harvest year.
The CFTC investigation will focus closely on how such hedge-to-arrive contracts affect the July corn futures and options contracts traded on the regulated exchanges.
“We will do our best to prevent any disruptive market impact associated with the rolling or offset of those hedges,” Tull said at a hearing on the status of the Commodity Exchange Act.