You might 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 financial 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.
The federal Commodity Futures Trading Commission said this 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 hedge-to-arrive contracts big money-losers.
Industry watchers estimate $750 million could be lost as a result of these contracts, which number in the thousands and usually exist between individual farmers and grain elevators.
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 farming operation 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.”
Such 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, a departure from traditional contracts for future delivery of a commodity.
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.
At least one lawsuit, against Archer Daniels Midland Investor Services and several elevators, seeks class-action status, said Nicholas Iavarone, the lawyer for the farmers.
“They (farmers) were told that here is a way, with virtually no risk, to market your grain over a period of years,” he said. “No one explained to them … that they could end up delivering their grain for nothing. Basically what they were facing was unlimited risk.”