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Financials hold grain markets hostage

Agriculture.com Staff 08/16/2007 @ 1:47pm

Most producers know that oil changes can help a tractor's engine run smoother. How grain markets are affected by the consequences of the current global financial markets picture, however, leads to a lot of head scratching.

Believe it or not, the world financial markets are melting down, and the grain futures are feeling the heat.

On Thursday, the Chicago Board of Trade soybean futures market traded lock-limit down, and it even traded lower than that in the synthetic market. Funds sold 15,000 contracts of beans and 12,000 soyoil.

So, what's happening? It's being called a general breakdown in equity. The trading funds are running for cover from further losses.

ECB (European Central Bank) is injecting billions of dollars into its organizations to prevent a global market meltdown, sending a sense of urgency and panic to the market overall to start unwinding positions.

On Wednesday, the Dow closed below 13,000 for the first time since April, and Japan stocks had one of their biggest one-day losses since September 2001.

So for the trading funds invested in Japan stocks, equity is a big issue. Again, the question posed is, how does this affect the U.S. grain markets?

GRAINS TIED TO FINANCIALS

Noel Blue, a CBOT floor trader and broker, offers up 'World Markets 101'.

Blue says that, in general, assets under management maintain portfolios with a diverse mix of positions across the board, including equities, financial instruments, metals, energies, commodities, etc.

"When companies make a formal request to the Commitment of Futures Trading Commission (CFTC) to halt redemptions (as customers try to make significant fiscal withdrawals from their asset pool) and are denied such a ridiculous request, the market participants across the world take notice that it may be time to liquidate positions in a variety of products," Blue said.

Also, some of the organizations who made such bad subprime mortgage loans and have surfaced in the headlines since the spring, hold (or are speculated by many to hold) money on their books for certain CTA (commodity trading advisers).

"If the customers want to withdraw funds, and these organizations need to come up with money to give them, we move into a forced liquidation mode on a global scale," Blue said.

"It's not really that CTA's think it's a good time to sell", said Blue.

"But they have to lessen the load, and some of it happens to be in agricultural commodity products. This is a process, and we will revert back to value and more accurate prices once this crisis flushes out what it needs to."

Blue added, "The liquidating of trade positions has a moving target, and we have to be patient to see how long it's going to play out. But no market is immune to its propensity to run you over in the process."

ALL EYES ON HEDGE FUNDS

Perhaps the easier explanation that ties financial and grain markets is the record volume and open interest in grains this past year. Most of that came from hedge/pension funds, or trading groups that incorporate technical strategies and have significant amounts of capital.

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