A controversial hedging technique for Corn Belt farmers may wind up costing them and grain elevators as much as $500 million.
The ultimate impact is still uncertain, but some bankers are worried.
Outstanding "hedge-to-arrive" contracts could expose holders - in most cases grain elevators that take delivery of grain from farmers - to losses estimated at between $200 million and $500 million, according to the Chicago Board of Trade. The dollar value of the grain involved in the contracts has not been determined.
"I think it's fortunate in some ways that it happened this year instead of two or three years" from now, said Neil E. Harl, a professor of agricultural economics and finance at Iowa State University. Such contracts "were spreading like a virus."
Denver-based Cobank, a Farm Credit System entity that's one of the nation's largest lenders to grain elevators, said about 92 of its 2,000 elevator customers have some meaningful hedge-to-arrive exposure.
About 20 of them will have severe financial problems, said Jack Cassidy, senior vice president for corporate relations. Survivability is questionable at about 12, half of them in Iowa, he said.
The debacle in hedge-to-arrive contracts could be a clarion call for more banker education on the risks associated with futures contracts, farm experts say. As government controls on price and yield are phased out in coming years, they say, bankers will have to learn more about the risks used to hedge farm commodity prices.
"It wasn't something that we were looking for - or we would've asked some questions," said Paul Johnson, chief executive of $115 million-asset Iowa State Bank, in Algona. About 5% of the bank's customers used the hedges.