MF Global: as a fair-sized investment firm, and now the eighth largest announced bankruptcy in U.S. history, this name may at first glance seem to have no bearing on your personal or coffee business life.
Look a little more closely, though, and you could find it more connected to your universe than you think. Beyond the fact that you likely hold at least one mutual fund that has an investment in the firm -- and hence have taken some kind of direct financial hit -- MF Global was a huge clearing house for coffee futures contracts.
Green coffee brokers, exporters and roasters use coffee futures to hedge their positions, in order to mitigate the risk inherent in booking coffee contracts for clients and/or their own consumption, looking forward. MF Global handled these contracts, ensuring monies traded hands accordingly and so bringing necessary liquidity and governance to the market. Although the cause of the company's implosion, a heavy bet on Euro debt, had no direct link to the coffee industry per se, the accounts of those companies that made use of MF Global were immediately frozen when it became apparent there were irregularities in its financial statements, and monies allegedly appeared to be missing -- a reported $600 million.
As the coffee buyer for Heritage Coffee, I happened to have my futures account with MF Global, and so this was daunting news indeed. Though we are fortunate to have sufficient cashflow to withstand an account freeze, our inability to function as desired for a few days forced us to look at other avenues for our trade requirements. After a bit of stress and extra toil, we had things back on track.
Unfortunately, in speaking with some of the folks we buy from, I learned that they too had accounts with MF Global. Since coffee trading is the only thing they do, the numbers involved represented a far greater percentage of their total cashflow and the impacts ranged from the not too good to the utterly disastrous.
The whole mess has created a major concern that I have not yet seen addressed by the media. We all know how much paperwork and manpower is presently needed to comply with the myriad regulations businesses must endure. With MF Global blowing up in the midst of the picketing as assorted protesters occupy Wall Street (and generally disrupt business in as many cities as possible), there is little reason to hope that government will not enact a plethora of new regulations drafted to stem the tide of skullduggery perpetrated by those who control the war chests of global business.
I'm all for keeping folks honest. Unfortunately, however, it seems that the tens of thousands of existing regulations have accomplished nothing in keeping disasters such as MF Global from happening; so how can we expect the next wave of red tape to do so?
What the next wave of regulations will do is create yet another layer of effort to be exerted by our businesses, sucking up untold employee time and expenses. Ironically, the manpower costs incurred by the huge businesses responsible for helping to create the present mess in complying with new rules will represent a tiny fraction of their annual budgets.
My broker has already hired two more employees, doubling his payroll, just to handle the flood of new paperwork. Guess who will eventually have to pay that piper? You can have all the laws you wish on the books, but if there is no police force, drivers will continue to run stop signs and speed to their hearts' content. Without effective regulatory oversight, businesses will continue to sabotage the system.
The government's inability to keep these financial meltdowns from happening is the really scary part of this story. What if your company's bank accounts were frozen over this coming weekend, with no date given for either freeing them up or liquidating them? Do you have the cashflow necessary to meet payroll and short-term debt needs?
We've taken a lot for granted in our free society, and in order to have it remain free, unfettered by Big Brother, we have always maintained an honor system under which businesses police themselves and no one would dream of taking risks that could topple an entire enterprise. Nowadays, that sense of honor seems to have flown the coop; everyone has jumped on the risk wagon, believing that the government will provide a safety net to recover from any calamities caused by failed gambles. Just look at the stock market of the '90s or the real estate market of the 2000s for examples of this new risk-taking on everyone's part, not just big business and banks. Marching on Wall Street seems a bit narrow in vision when we are all complicit in one way or another.
I have the sense we will see a bit more pain before calmer heads prevail and wanton risk-taking loses whatever luster it has left. Until then, I think I'll get a bigger petty cash drawer.
KEVIN DAW is president of Heritage Coffee Co. (London, ON, Canada), a leading private-label roaster serving the breaktime management industries in North America. He is in charge of coffee buying for Heritage. A 30-year veteran of the workplace service business, Daw has served as a commission coffee service salesman, a principal of a vending operation and president of a bottled water company. Since 1990, he has concentrated on coffee roasting. Active in industry affairs, Daw is a Specialty Coffee Association of America Certified Brewing Technician, a member of the National Beverage and Products Association Hall of Fame, a recipient of the National Automatic Merchandising Association Supplier of the Year Award and a NAMA Coffee Service Committee member.