Hedge-To-Arrive Grain Deals
Ruled Illegal By CFTC Judge

BLUE EARTH, Minn. —(AP)— An administrative law judge with the Commodities Futures Trading Commission in Washington, D.C., has ruled that hedge-to-arrive grain contracts sold by the former Grain Land Cooperative are illegal and unenforceable.

The contracts have been the subject of legal wranglings between the once thriving co-op and about 150 Faribault County farmers for more than two years.

The unregulated contracts are profitable when grain prices drop, as normally happens in the fall after a big harvest. In the past, grain didn't change hands and elevators rolled over the agreements, which had no specific delivery date for the grain. Farmers then sold their grain when they needed the cash or when market conditions improved.

But prices soared in 1996, making the price farmers agreed to accept from the co-op much less than the cash price offered on the open market.

Grain Land notified farmers that it would not continue to roll over the contracts because it didn't have corn to cover its obligations to the Chicago Board of Trade and couldn't afford to pay the margin calls — the difference between what it would cost to replace the grain and the selling price.

Farmers were told they must sign new contracts with specific delivery dates or agree to deliver the grain. The lawsuits began when some members in the 3000-member co-op refused to follow Grain Land's instructions.

Judge George Painter ruled the contracts are futures contracts and were offered illegally by Grain Land. Futures contracts can legally be sold only by licensed brokers on a registered board of trade.

Grain Land attorneys had argued that the contracts were forward contracts and exempt from regulation by the Commodities Futures Trading Commission. Painter disagreed, saying the contracts focused on making money, not delivering grain.

Painter found the co-op acted in violation of the Commodity Exchange Act and issued a cease and desist order to stop all attempts by Grain Land to enforce its hedge-to-arrive contracts, including its ongoing lawsuits against farmers.

Last year, U.S. District Judge Paul Magnusen ruled that the hedge contracts were forward contracts and not subject to regulation by the Commodities Futures Trading Commission. That decision allowed the lawsuits to go forward.

An attorney for Grain Land asserted that the federal legislative branch, not the CFTC, has jurisdiction over the issue and expects Magnusen's previous decision will stand on appeal.

Attorney David Taylor, who represents farmers, supported Painter's ruling, saying the contracts were risky and should not have been written.

"Maybe this will prevent their use in the future," Taylor said.