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Index Fund investing influences U.S. soybean market

Agriculture.com Staff 01/13/2006 @ 9:35am

The U.S. soybean market has always been heavily influenced by fundamental factors such as China's demand, weather, and the size of the South American crop. This year, market watchers say you can add index funds, or better known as outside agricultural investors, to the mix.

Along with looking at the fundamental factors of the soybean market, analysts now explain how involvement from index funds may underpin soybean prices.

For example, already in 2006, the January soybean futures price on the Chicago Board of Trade (CBOT) jumped more than $0.60 per bushel since Thanksgiving. Because many bearish fundamental factors hovered, this was considered by many market analysts as a good example of index funds boosting prices.

Large companies like Cargill make up the category of commercial funds, while a mixture of large companies and large investors, some could be large producers or non-agricultural companies, are considered index funds.

John Roach, president of Roach Agriculture Marketing, said that any soybean market outlook would be incomplete without considering what the index funds are up to.

"Because commodities are considered the hottest 'asset class' on Wall Street, index fund investors are looking to put their money into the corn, wheat and soybean futures markets," Roach said.

"Essentially, a lot of people's retirement money if being managed by a fund manager, 5%-10% of every month's contribution is finding its way into a commodity index of which could include agriculture commodities," Roach said.

Looking ahead to this spring and summer, with already large 2006 U.S. soybean ending stock figures, combined with large crops expected from South America and the U.S., the market may have to rely on outside forces or index fund investing for support.

"I'm worried we could have a counter seasonal low in the soybean market when you normally put a high in the U.S. market (spring or summer) brought on by a big crop in South America. Between what we have in the bin and what they (South America farmers) brought off their field, there will not be enough demand that wants that inventory," he said.

In addition, if U.S. farmers plant more soybeans than corn this year as projected by many market analysts, Roach says more bearish factors present themselves.

"It would be more surpluses on top of surpluses," Roach said.

Meanwhile, though it will continue to be a competitor for the U.S. soybean market, whether Brazil can boost acres to meet future demand from customers like China remains a question, Roach said.

"Brazil has the land mass compared to the U.S., but their farmers struggle with profitability from year to year and therefore either abandon acres or shift to some other crop. Because of currency realignments, their farmers could see more years of being unprofitable," he said.

The U.S. soybean market has always been heavily influenced by fundamental factors such as China's demand, weather, and the size of the South American crop. This year, market watchers say you can add index funds, or better known as outside agricultural investors, to the mix.

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