Iowa Public Television


Role of Funds in Commodity Trading Increases

posted on February 18, 2005

According to USDA, farmers have claimed nearly $2.5 billion in LDPs on some 8.7 billion bushels of the 2004 corn crop. The average payment was about 28 cents a bushel. Smaller LDPs have been collected on 1.3 billion bushels of soybeans ... and 400 million bushels of wheat.

LDPs, or loan deficiency payments, become available to farmers when cash prices fall below government-guaranteed crop loan rates.

The influx of LDP money has helped keep farm wallets fat this winter. It's also kept farmers from selling large portions of last year's bumper harvest as commodity prices fell. But the markets are moved by more than just farmer holding and selling. In recent weeks, the soybean trade in particular has been influenced by the activity of the funds.

Role of Funds in Commodity Trading Increases The funds are companies or individuals who see the commodity markets as speculative ventures or an investment tool. They do NOT have cash grain backing their position.

Typically, funds are non-commercial ventures, like international investment firms, or investment branches of commercial grain companies. Their opposites are non-fund investors, or commercials, a group of hedgers that might include elevators, crushers and other end-users.

The presence of the funds in the commodity markets has grown significantly in recent years, especially as a short-term investment tool. But one of the key roles played by the funds is to provide liquidity. Without the funds to take the opposite side of a hedger's position, the principles of trading futures contracts would be undermined. Even so, some market watchers contend the dominant position of the funds gives them undue influence in the pits.

Tags: agriculture markets news