Tuesday, March 1, 2011

High volatility in the market as Hedge funds liquidate positions.


Last weeks liquidation of US agricultural futures is a testament how much influence hedge funds have on the market, and how speculative volume has increased. Figures released from the Commodity Futures Trading Commission, indicating that speculators reduced bets on rising wheat prices by 57% last week, the biggest drop since November. Bullish bets on soybeans fell 17%, declining for a third straight week, and those for corn slid 1.8% to a seven-week low. Although fundamentally little has changed (especially in the white hot corn market), it should be taken as a warning that the preceding seven month bull run may be running out of steam.

With civil unrest in the Middle East and North Africa threatening to curtail economic recovery, speculative money flowed out of ‘riskier’ agricultural futures and into crude oil and gold. Then last Friday we saw funds re-emerge and buy back previously sold positions, making it one of our most volatile weeks of the year and first major correction since December.

During the preceding six months, Barclays Capital has estimated that $2.6 billion has flowed into agricultural derivatives, after a record $5.7 billion during the fourth quarter of 2010. And so when hedge funds hold these very large net long positions, and suddenly exit the market, the price moves are magnified and the end result is limit down fluctuations. There are many diverse cashed up hedge funds looking to spread their investment portfolio, and for a small fraction of them to be convinced to own some commodities, is creates new demand and thus greater volume.

The days are long gone when you can simply focus on supply and demand, now traders and growers alike must keep track of the world political situation that threatens world economic growth, world currency, interest rates and ethanol mandate levels (an industry that consumes 40% of US corn), all while trying to gauge investor’s appetite for risk. As a result, it is becoming a delicate balancing act in the grains market and that's creating extreme price volatility.

Although there was a short term sell off last week; the true fundamentals remain strong going into 2011. While excess volatility presenting potentially historic pricing opportunities, it also increases the large swings in daily prices that we have witnessed. As a result basic supply/demand fundamentals must remain the basis for making long-term marketing decisions. Expect March to have increased buying volume, as is usually a buying month for funds as they add ‘long's’ for the uncertainty of the Northern Hampshire spring planting and growing season.

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