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Higher prices calm hedge fund storm, traders say

Agriculture.com Staff 12/19/2007 @ 3:18pm

CHICAGO, Illinois (Agriculture Online)--Is tracking the activity of the hedge funds any way to market your crop? That question has been posed in the Agriculture Online Marketing discussion group.

Many floor traders say producers should pay attention to the hedge funds' involvement. Making marketing decisions should involve knowing, not ignoring the hedge funds' positions.

In January, the hedge funds will rebalance their portfolios. Some analysts believe the process has already started.

The latest thought on the Chicago Board of Trade floor is that as prices get higher the hedge funds have to do less rebalancing of their portfolios.

Since early December, traders have estimated that when the hedge funds finish rebalancing they will have sold an estimated 70,000 contracts of wheat and 25,000 contracts of beans while buying 70,000 contracts of corn.

However, corn, soybean, and wheat markets have held strong in December, bucking a seasonal year-end trend of lower prices.

Joe Bedore, FC Stone floor manager at the Chicago Board of Trade says the hedge fund rebalancing phenomenon may have to be refigured.

"Watch the market, because the hedge funds won't rebalance as much if the prices stay high," Bedore says. "Three years ago, the funds started us on a huge rally in January and February."

Vic Lespinasse, Illinois Grain, agrees these higher prices may alter the amount the hedge funds rebalance. Plus, the index funds continue to see dramatic growth.

"As long as the market goes their way, why would the funds rebalance too much out of agricultural commodities. We've had some profit-taking sending prices a bit lower," Lespinasse says. "But, keep in mind the huge rallies we've had."

For example, the CBOT March wheat contract was trading, in the middle of November, at $7.75 per bushel. "Recently, it traded over $10.00," Lespinasse says. Lately, the wheat market has seen price fluctuations of 50 cents. But, we've rallied $2.00 per bushel since November."

The CBOT floor talk remains that in 2008 the hedge funds will be big sellers of wheat and beans and buyers of corn.

Recently, AIG Financial Products, the second largest index fund, reported it has $42 billion under management. Also, AIG estimated all index funds will have $140-$145 billion under management in 2008. That compares to $110 billion a year ago.

Carlton Krumpfes, CBOT floor trader with K-Commodities, says higher prices translate into higher trade margins. As a result, funds will reallocate less.

"As prices go higher, the premium to hold a trade position goes up," Krumpfes says. For example, wheat used to be a $900 trade product to hold, now it's nearing $2,000."

So, the person that traded wheat last year may have held 100 contracts overnight. Now, they are holding 50 or 40, Krumpfes says.

In addition, there may be less of an appetite to rebalance, with so many markets at or near contract highs and all-time highs.

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