Where have all the funds gone?
Like clockwork, my phone rings with a seasonal pattern and theme. In the spring and summer, callers ask if the funds will stop buying and how high the grains will go.
As the new year starts in the dead of winter, with grains locked up on the farm for a long winter’s nap, callers ask where the funds went and where the bottom is on grains. Unlike the metal markets and stock contracts that trade with vengeance year-long and for hyper-trading periods, grain markets are seasonal to funds.
What are funds?
In 2008, the government changed laws to allow conservative-managed stock funds handling pension monies from businesses to trade in commodities, once thought to be too risky.
Overnight, the control of grain futures pricing went from million-dollar commercial agricultural-minded funds to billion-dollar Index and Trend-Following funds, that are largely handled by technical and systems traders.
Those fund managers don’t know a bar of gold from an ear of corn, and they don’t care. They have so much money to trade, they have to spread it out among grains, metals, energies and into livestock futures in order to avoid trading limits. There has become a seasonal pattern to their allocation, and no market has benefited from this pattern more than grains.
The open interest on grains began its seasonal rise with the onset of spring in March, when all the uncertainties of how much of each grain the U.S. may or may not plant becomes of great concern. Open interest peaks around the beginning of the U.S. growing season, when weather and its impact on yields have funds building a weather premium into pricing until yields are determined. The market prices in fear or uncertainty before the actual fact.
In the chart above, notice on June 1, 2011, Index fund open interest (or number of contracts in the market yet to be offset on corn) peaked at 404,000 contracts. On July 1, the number of contracts dropped to 359,000. On August 15, the open interest was recorded at 350,000; on October 1, it was 343,000. Trend-Following funds’ activity in the corn market peaked on June 1 at 310,000 contracts; by October 1, it sat at 159,000.
When the harvest was under way and all the fear and uncertainty was gone, open interest hit its low, right on its seasonal time frame. Where did the money go? Not in the bank. That’s because fund managers are paid to invest the money where returns for investors can be met.
Some went to crude oil, pushing prices from $75 per barrel in September to $104 in December. Gold saw a summer-to-September rally from $1,500 per ounce to $1,925. Silver saw a $28-per-ounce low lead to a September $50 high. Livestock absorbed grain open interest, as well, with a June hog low of $80 to $92 in October. Cattle was at $114 in June, peaking in November at $126.