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CBOT: Friend or foe?

Agriculture.com Staff 09/10/2008 @ 8:45am

Lack of price convergence between cash and futures, too much institutional investment, and increased margin calls are all reasons why many market participants say the Chicago Board of Trade is not the farmer's friend anymore.

It depends on which side of the fence you're on, I guess.

Take for instance the food producer, the livestock producer, and other end users. All of these market participants -- paying sometimes double for raw food or feed material compared to a year ago -- are very unhappy with the run-up to record-high commodity prices.

Grain farmers, however, are selling crops at prices their parents and grandparents never saw. From that standpoint, the CBOT has been a good friend.

Since October 2007, Successful Farming magazine/Agriculture Online (www.agriculture.com) has had a desk on the floor of the Chicago Board of Trade. I've been manning that desk, interviewing floor traders, and following the markets tick by tick.

I log the traders' comments and delayed price action on an hourly basis on Agriculture Online's marketing discussion group.

These floor reports have caught the attention of Agriculture Online visitors.

One farmer remarks that he loves the idea of being able to sit in his barn in Oklahoma and know what the traders are thinking in Chicago. Yet, other market participants believe the floor traders are out of touch with what is really going on out in the country.

Whether you agree or not with the price discovery at the CBOT, it has been impressive to watch corn run up to $8 and soybeans rise to the mid-$16 level.

Throughout the trading day, I'm asking floor traders about what is driving these prices higher and higher. The answer, more times than not, involves either the buying or the selling of hedge and index funds.

Having nearly $240 billion invested in the agricultural commodities, the funds can buy all of the U.S.-produced corn, soybean, and wheat crops twice over.

Because these institutional investing groups add or subtract trade positions in large chunks, the CBOT prices have huge swings nowadays. Traders say the funds create volatility in the market.

A 5-cent or 10-cent price swing is considered a slow day anymore. A 25-cent move for the corn market or a 50-cent move for soybeans is more like it.

So if the market is breaking, it doesn't take long to regain the losses. At the same time, if the markets rally, a showstopper could easily be introduced by the funds taking profits.

Within all of this activity, the markets are underpinned by tremendous volatility. Traders say that when the funds' involvement isn't providing volatility, the old-shoe supply-and-demand fundamentals always weigh in.

Perhaps the downside of outside money influencing the futures market is the uncertainty of fund activity.

One trader says there will be opportunities in this market for farmers to sell. But the fear is the day the bottom falls out and nobody knows why. Unlike a favorable weather pattern that flashes bearish signals like a neon light, funds exiting their positions are much harder to anticipate.

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