Roach: The index funds have become larger and larger entities across all market areas. Index funds, for those who are not familiar, are pools of money, sort of like a mutual fund of the stock market, that only purchase a basket of commodities. There are several different index funds and the basket of commodities will be different. But most of them will include energies, precious metals as well as agriculture commodities. What has been important here in the agriculture commodities is the size of these funds are large and the money has continued to flow into those funds. As an example, since the first of the year, looking at corn, wheat, beans, soybean oil and soybean meal, those index funds have purchased about 170,000 contracts of agriculture commodities and that's a substantial number.
Borg: Those are speculative investments then?
Roach: They would be speculative investments for someone who believed there was inflation on the horizon and they wanted to own a hard asset and a basket of hard assets I should say that will increase in value if inflation really comes.
Borg: How does it influence, if at all, agricultural markets, that is the day-to-day markets?
Roach: Well, as I mentioned, since the first of the year they have purchased 170,000 contracts of grains, just of grains. On the other side of that we have seen the commercial grain firms purchase about 200,000 contracts of shorts. The commercial grain firm buys grain from a farmer and hedges it in the futures which makes them have a short position and since the first of the year they have purchased or re-purchased about 200,000. As they have sold the inventory to a user they take off their hedge. So, the index funds at 170,000 contracts are almost as big as the commercial grain firm purchases since the first of the year. So, that's a very substantial number. On the selling side we've seen speculative funds that go in both directions. Index funds only purchase and hold. Speculative funds will either go long or go short depending on which way the wind is blowing.
Borg: If they are purchasing and holding is that increasing real demand on the market?
Roach: Well, it is taking inventory off the market, so to speak, so that the impact that they've had in the grain marketplace is to, in general, push grain prices higher or lift grain prices higher. Even a greater impact in the livestock markets where the index funds have held the largest long positions many different times during the recent years.
Borg: On the other hand, help me understand, if they're selling then that -- would it depress the market?
Roach: If they were selling it would. And what we do have is we have managed funds that do actually go net short, they actually -- if the trend of the market is going lower then they go and take a short position. The index funds, however, accumulate and hold because that is what their investors want them to do, they want them to hold a basket of commodities in case, in anticipating inflation.
Borg: And we've been hearing a lot about more regulation needed of these index funds. What do you think? Would it be good for farmers?
Roach: Well, perhaps maybe a little bit more regulation but they really provided a solid lifting of prices. So, farmers should like what index funds have been doing. However, on the other side, some would suggest that they also were part of the reason the petroleum market went up so much back in 2008. So, there's good news and bad news there perhaps for farmers. In some markets they seem to have a very large impact, wheat particularly. Index funds have owned enough wheat contracts that the wheat futures and cash sometimes do not come together at delivery. So, that is another problem that they have created. But, in general, they have helped boost prices and since the first of the year they have been substantial buyers and accumulating inventory.
Borg: John, thanks so much for the insight. John Roach and this is our March 19th Market Plus segment.