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Funds liquidate wheat positions

06/04/2012 @ 6:57am

There has been evidence for a few months that index funds were pulling money out of the commodity market space, and more reports of that kind of activity surfaced recently. Tiring of usually buying the carry and hoping for long term uptrends to make up the difference – and failing – several large fund managers are throwing in the towel. 

While some may bemoan the loss of volume, read that the exchanges, the commodity markets may well be better off without the elephants in the swimming pool. Too many markets simply were not big enough to handle the waves of trading that too easily pushed prices well beyond what would be considered reasonable moves. Just because you see a lot of ‘volume’ in a market, doesn’t necessarily mean that there is a lot of ‘liquidity’, a common misinterpretation. 

The wheat market is an excellent example of this type of price action. Time and again, big moves on the open or close were largely due to funds slapping huge orders into the market, trying to establish or liquidate positions that were just too big for the market to absorb. The cash markets refused to follow along, thus creating the artificial basis spreads, most notably in the Chicago futures. The exchanges knew this, but didn’t want to give up the volume of trades – being publicly traded companies their commitment was to profits, not necessarily market integrity. 

The inverse correlation between commodities and equities was lost as well, as index funds trade commodities through the equity markets. Now where one went, so did the other – creating frustration among fund managers who sought hedges in one space versus another but couldn’t find them.

Wheat markets spent the holiday shortened week succumbing to waves of selling. Harvest pressure, rains in the northern Plains and Canadian Prairies, light rains in southern Russia, a sharply higher dollar, and financial market woes were just too much for a market that had seen a sharp rally just three weeks earlier on the fear of weather problems in the Black Sea.

While the Black Sea region is still suffering, the light rains in the key dry pocket of southern Russia were enough to stall the price rally and the worldwide economic issues led to widespread liquidation of several markets, including grains. 

Back to the fundamentals… harvest is rolling rapidly along, now well into Kansas – a record early start for them. Yields and quality have a wide range, but it appears so far that the far southwest again had a disappointing year – particularly after what looked like a good crop just a month ago. South central Kansas is reporting good yields and quality, especially for those regions that got late rains. Those that went without the rains when it was hot just a few weeks ago saw a notable drop in production over the last month.

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