BY DOUG JENNESS AND SHIRLEY PEŅA
DES MOINES, Iowa - A federal agency announced November 13 that it is challenging the legality of grain contracts that have been in dispute between corn and soybean farmers and the owners of grain elevators throughout the Midwest. The Commodity Futures Trading Commission (CFTC), a federal regulatory agency, has filed administrative complaints against Grain Land Cooperative in Blue Earth, Minnesota, two other grain marketing cooperatives, a St. Louis brokerage firm, and a marketing consultant, over promotion and marketing of grain derivative contracts referred to as "hedge-to-arrive" (HTA) contracts.

Two days later, in a seemingly contradictory move, a county judge in southwestern Minnesota ordered 58 farmers to deliver more than 1 million bushels of corn under the same type of contracts that the CFTC has declared illegal.

Throughout the Midwest this past year, thousands of grain farmers have faced losses of tens of millions of dollars because they are unable to meet contracts signed with elevator owners and other grain buyers. Losses in Iowa alone are running upwards of $120 million; potential losses are estimated at $1 billion for all of the Corn Belt. In Dayton, Iowa, a 50-year-old farmer, Marlan Bloomquist, is reported to have hung himself over money owed to a local elevator.

The crisis has reached the point where farmers have felt their only recourse is refusing to deliver grain under conditions grain merchants and elevator operators claimed were agreed upon by hedge-to-arrive contracts. For example, in June, 150 farmers informed the Grain Land Cooperative in Blue Earth County, which has 3,000 members, that they wouldn't fulfill their contractual obligations to deliver their grain to the co-op.

The resulting loss for the cooperative is estimated at up to $20 million. In response, the managers of the Grain Land Cooperative filed suit against some of the producers, who it claimed had broken contracts for the delivery of hundreds of thousands of bushels of corn. Nationally, elevator owners are suing farmers for amounts ranging from $31,400 to $1.5 million.

In October, the Blue Earth farmers responded, filing a suit asking the federal district court to declare the hedge-to-arrive contracts unenforceable.

The finger of blame for disastrous effects of the hedge-to-arrive contracts has been pointed at everything from alleged poor business practices of individual farmers to inept policies of local grain elevator operators.

Due to the insecurity of the capitalist market with its sudden fluctuations, most farmers don't sell all their grain in direct cash sales. If they did, farmers would often end up getting paid less than the cost of production if the selling price is especially low at the time of delivery.

The wide disparity in prices is shown in the highest and lowest cash prices for a bushel of soybeans. In 1995, the disparity was $2.67; in 1994, it was $1.69. Farmers try to offset market insecurity
To try to protect themselves against the hazards of the market, farmers over the years have employed a variety of methods, including futures and options contracts traded at commodity exchanges and handled by a broker or local grain merchant. This allows them to expand the time span they are able to market their produce.

There are at least a dozen types of contracts a farmer can enter into in the futures market. A typical one is when the grain seller contracts to deliver a promised quantity of grain and the elevator owner pays an agreed upon "locked-in" price during a specified time period. This contract is employed when the farmer tries to "hedge" against a drop in grain prices by receiving a guaranteed price.

Many of the grain buyers are middlemen between the farmers and the big grain traders. They also take steps to "hedge" their future costs and increase their profit margins by entering into futures and options contracts in the grain market using their contracts with farmers as collateral. (In addition to grain sellers and buyers, there are speculators who have nothing to do with the grain business but simply buy and sell commodity futures on various commodity exchanges, much like their ilk play the stocks and bonds market on Wall Street.)

The hedge-to-arrive contracts, which started being used in the early 1980s, are designed to be a defense against falling prices. The contract specifies delivery at a set price, but at no set date. Some farmers will tie up as much as five years of crops in such contracts - if they believe that the market is heading downward.

If the price, however, on the Chicago Board of Trade goes up and is higher than the designated future price, the buyer, not the farmer, collects the difference. In such cases, farmers would do better to sell their grain on the open cash market and many do, with the intention of buying more grain later at lower prices to meet their contract obligations to the grain elevator owners.

George Naylor, a farmer from Churdan, Iowa, explained to the Associated Press, "There's nothing wrong if you're really hedging grain during a time when you have grain in hand. It's when you're speculating that there's a problem."

This year, however, grain prices went through the roof as the result of a smaller than usual crop in 1995 and a big increase in exports, especially to China. As one savings bank president asked rhetorically, in a Wall Street Journal report last summer, "Who'd ever think $5 corn could break farmers?" High grain prices spur crisis
Many farmers holding HTA contracts expected they would be able to "roll over" their promised delivery into next year's harvest, a common practice in pricing contracts. But with skyrocketing grain prices, many farmers were unwilling to wait to deliver their grain to the elevator owners when they could sell it for unusually high prices right away. They argued that the HTA contracts gave them the right to choose when they delivered their corn and at a price they liked or to sell in the open market at a higher price and defer delivery indefinitely to the grain elevators. This has meant that the elevator owners began losing money hand-over-fist as they did not have the grain to fulfill their own futures contracts they had sold on the grain exchange; thus, the intensified conflict between farmers and grain dealers.

Many farmers caught up in the contract crisis have pointed to misleading agreements that did not spell out who would bear the cost if grain prices shot up. In June, 40 Iowa farmers filed a federal class-action suit charging fraud against ADM Investors Services, a futures dealer owned by Archer-Daniels Midland Co., one of the world's largest agribusinesses. In response to mounting anger among farmers, the CFTC announced that it would "aggressively investigate" alleged fraud in the HTA contracts.

A minority of grain farmers have been using this particularly risky form of contract and even many of them have worked out compromises with the grain dealers. In cases like the Grain Land Cooperative - most of whose 3,000 members aren't using hedge-to-arrive contracts - many farmers are resentful that they will have to share the burden of the cost of contract breaches by a minority. The operators are attempting to use this to pit farmer against farmer.

The recent contract crisis has underscored again the true nature of producers cooperatives in the United States today as capitalist, profit-making enterprises in which the interests of working farmers count for little.

At the same time, the current crisis is another reminder of how working farm families can't achieve any kind of security within the framework of the capitalist market. The dog-eat-dog competition of capitalism is reflected in the manner in which agribusiness functions - from the futures market, the international trade monopoly of farm machinery, seeds, and pesticides to the bankers.

The Socialist Workers Party candidates in the recent elections explained that profit-making has to be taken out of the trade of all agricultural commodities, including grain. This can only be accomplished, they explained, through government monopoly of farm trade in which farmers can be guaranteed a price to meet production expenses and have a decent living standard. To establish a state monopoly of trade that will truly benefit working people, wage workers and working farmers will need to mobilize a mass revolutionary movement that can sweep aside capitalist political rule and establish a government of workers and farmers.

Shirley Peņa is a member of United Auto Workers Local 997 in Newton, Iowa and was the 1996 Socialist Workers candidate for U.S. senate in Iowa. Doug Jenness is a member of United Steelworkers of America Local 9198 in Roseville, Minnesota, and author of Farmers Face the Crisis of the 1990s.  
 
 
Front page (for this issue) | Home | Text-version home