Issue: From their inception in the mid-19th century, futures markets have functioned as an important tool for agricultural producers to transfer their price risk to other investors. Over the years, futures markets have become inextricably intertwined with other marketing institutions. For example, forward contract offerings are invariably based on quoted futures prices. Similarly, price guarantees on crop insurance products are derived from prices established on the futures market. Thus, futures markets not only allow one means of transferring risk, they inform all agricultural marketing arrangements and influence price discovery in all other related markets. Their role in the agricultural economy is difficult to overstate.
Background: The causes of the collapse of MF Global (MFG) are, almost six months after the fact, still not entirely clear. Available evidence suggests that the firm entered into large, highly leveraged positions on European sovereign debt. As the price of European bonds fell, MFG’s positions lost money. As this exposure became apparent, rating agencies downgraded MFG’s credit rating, raising their borrowing costs at the same time that their trading positions were losing money. Ultimately, MFG was unable to raise the funds necessary to meet margin calls on its open positions and was consequently forced into bankruptcy.