|
April 30 – HAVE GRAIN MARKETS PEAKED: Lot’s of talk surround that
questions these days and the traditional wisdom indicates they have not. Whether that is reality or a lot of corn farmers standing in mud instead of planting time will tell.
However, their is growing evidence that the current market is being driven by many
factors, and one of the most difficult for many people to wrap their arms around is the intrusion of the index funds into Ag commodities. As a grower or someone in the industry, you likely understand the phenomenon,
probably well enough to know why your neighbors and the media get a glazed look in your eyes when you try to explain the significance of this development.
If you are looking for a great overview of this issue in simple terms I recommend
getting a copy of the April issue of Corn & Soybean Digest. On page 52, well-known market advisor Richard Brock peels back the layers on this complex issue.
In his article he explains that index funds are long more than 2 billion bushels of
corn (twice the carryover) and 1 billion bushels of soybeans (nearly 40% of last year’s production). And let’s not forget the 1 billion bushels of wheat futures...2.7 times last year’s crop.
Brock says not to under estimate the impact of these funds. He explains how
investment firms try to balance investments on a monthly basis in order to stay in line with their perspectives. Using Goldman Sachs as an example he notes they try to invest 74% of its assets in long term energy
futures and 8.2% in long grain contracts. That ends up being $85 billion in energy and $9 billion to be long in grains.
So, as crude oil goes up and they try to keep this balance, and the percentages
noted above, more grain contracts need to be purchased. The bottom line is that as crude shoots up, so does grain. He says to forget the fundamentals of grain as you know them because the current situation is
strictly a money game.
“My biggest concern over the impact of index funds is that futures market has now
lost its purpose for existing...etc. With a non-fundamental influence like index funds pushing prices higher that they should have gone, the market has lost this price discovery method, Brock says.”
Great food for thought even if it is a little scary!
|
