Roach: Well, you're exactly right. Index funds have been granted a hedging exemption which means they are not subject to the speculative limits in those markets that have speculative limits which would include all of our grain markets and livestock markets. As a consequence they are able to pool together larger and larger and larger groups of people and buy more and more contracts and in essence that's what they have done, they have continued to grow over time in our agricultural markets and own from 25% in the case of corn and beans or thereabouts up to 40% in the case of the livestock markets and the cotton market of the total ownership.
Pearson: Are these long positions like in the livestock markets?
Roach: Those are the net long positions looking at the CFTC report today. So, the concern that we should have because this is one of those things that can come catch you when you're not thinking about it is when they change the rules what will that require these index funds to do? It would seem to me that if I were writing the rules I would say no fund or any program trading system should be able to trade bigger than one speculative limit because it is speculation, it is money buying commodities to take advantage of a price move, it's not to take delivery. So, that has been particularly worrisome in wheat and we've seen the other kinds of funds, the professionally managed funds, which are subject to limitations, their heavy shorts in the market anticipating a rule change. Now, that may not come or they may have already anticipated it but we're going to hear more talk about this as we go through the next few weeks here and the next couple of months and we can expect to see some rule changes coming.
Pearson: What should producers do?
Roach: I think producers need to look at that as one more reason that they have to be careful with the inventories of grain that they have. A lot of times producers think that they really understand everything that is out there impacting their price structure but if the rules get changed on something like this, and it's really widely anticipated the rules will change, then that will have a quick impact in the futures prices.
Pearson: I'm convinced more and more the older I get the less I know and as we've witnessed the last couple of years and what has happened in the commodities markets you mentioned wheat, you mentioned where they are a big player and you were mentioning the basis that we saw in the last twelve months that seemed to be so irregular, basis historical patterns where the board was so high and cash prices weren't. This could be one of the issues related to these index funds and their ownership?
Roach: That is exactly what happened in the wheat market and there were some other issues as far as delivery was concerned but the price of wheat in Chicago was drastically higher, on the futures market, drastically higher than the cash market, it was disjointed and so that set off hearings that started really last summer but the hearings really gained momentum in regards to the energy market and what impact that the speculative buying and the index funds had in that market.
Pearson: So, this is one of those things out here which could be an impact, they may not rule, they may rule what the hedge funds are doing is okay.
Roach: That's possible but that would be a surprise. Everybody expect some change, it's just a question of what will the change be. So, the issue becomes how will they view the speculative limits as it pertains to the index funds different from other speculators.
Pearson: We've got another minute, John, just generally tonight's discussion, obviously we've been waiting for some variables to not be variables any more, one of those variables was the USDA's August crop report, big crop corn, beans, wheat, plenty of supply everywhere, hearing a lot of concerns on the demand side, you talked about the livestock demand going forward the next couple of years, obviously the global economy is by no means in the pink. It's a relatively negative outlook as you're saying sell the rallies as they come. Have we kind of turned a corner in agriculture? We have these huge demand driven markets for really since about the middle of September of 2006. As we come into 2009 has that kind of run out of steam?
Roach: The huge demand driven markets got nailed with an economic collapse and so we expect to see some recovery in the economies around the world but the kind of optimism and enthusiasm that we saw a year ago it seems to be, we don't expect that. Now, certainly we can resurrect inflation at some juncture down the road here and most everybody expects that but before we resurrect inflation we're going to have to get through our harvest period, get all the crops put away and we think that puts pressure on the market.
Pearson: John Roach, as usual we appreciate your input, our senior market analyst on Market to Market. Thanks for being with us here on Market Plus today as well. Thank all of you for joining us here at our Web site and, of course, tell your friends and neighbors about Market Plus and talk to your local public television program director and say we'd like to see the live version of Market to Market weekly on our local public television station. Thanks for joining us. I'm Mark Pearson. From all of us on Market to Market, have a great week.