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Market Plus: Jan 13, 2006

posted on January 13, 2006

Market Plus: Jan 13, 2006

Pearson: Welcome to our Market Plus segment here at our Market to Market Web site. I'm Mark Pearson. With us this week our senior analyst, John Roach. John, good to have you with us.

Roach: Thanks, Mark.

Pearson: And there has been quite a change that has occurred in the landscape of the agricultural commodity world and that is since Katrina, since the energy price move, since gold prices started moving up a lot of people are seeing profits being made there and speculating in those products. They're saying hey, should we have some of that exposure in our retirement plan? Should we have some of that exposure in our institutional plans, our pensions and so forth? And now we have this commodity fund and commodity index funds and so forth hitting the market. On the show you said very positive impact.

Roach: It has been. There is two different kinds of funds. There is a we'll call it a trend following fund which has been the predominant player, big speculative player over the period of the last several years and many going into professional managed commodity funds that try to get on board the newest trend of the market whether it be going up or going down has certainly grown. And the size of their positions has gotten bigger and bigger. But the newest player that has come on the stream is, I'm just going to call it, it's a fund but I'll just call it an index because it pays attention to the index of commodities, that particular kind of investment buys the index. And, of course, the index is made up of several components and a certain percentage of that component, let's say maybe 20% of the total index is made up of agricultural products, particularly grains and so 20% of those dollars that come into one of those index funds just goes over and buys the appropriate number of contracts of corn and soybeans and wheat. And those indexes only buy, they always keep that money invested so it's almost as if they purchased a certain number of bushels and took it away from the marketplace because when they sell those bushels that they might have purchased 60 days ago, when they sell them out they go buy an exact same number of those bushels at a more distant month. So, that is almost as if taking an inventory out of the marketplace that is going to be permanently removed from the market until the investor decides to quit having money lying in an index fund. These indexes have become so prevalent that they are now a component of a lot of balanced investments. They are kind of the hottest thing out there for an investment professional to be selling, the concept that you would put five to maybe ten percent of your retirement investment or any other investment off into an index that then owns so many contracts of corn, soybeans as well as oil and gold and some of the more well known investment vehicles.

Pearson: Well, it's pulling a lot of money into the pits of Chicago which does increase ...

Roach: And it's all buy money, it's all buy money and that is a new phenomenon for us. Now, at the moment we have very big stocks of corn, very big stocks of soybeans and so it is having some impact. But if you get into a situation where the supplies become tightened it can have a phenomenal impact as those bushels are held off the marketplace.

Pearson: It's going to be interesting to watch. We'll watch the impact through 2006 as this, again, a new ripple in the world of commodity trading. So, another one producers need to be on top of.

Roach: The important part of this too is, so I don't miss the point here, the important part is that we are getting prices offered to us because of those funds that are higher prices than we would otherwise be getting particularly out into the new crop slots for corn and soybeans. We're being offered much better price levels than what the economics would justify because they are out there as buyers and there is really nobody out there willing to sell. The only people who would really be very willing to sell 2007 corn, 2008 corn would be producers and that is really what I'm encouraging producers to do. Take a look at those inventories that you're going to need to sell during those harvest periods and take a look at those price levels and you'll find that we're getting some opportunities to be making those first incremental sales that you don't want to miss.

Pearson: Some good points as usual, John Roach with us this week. I'm Mark Pearson. For all of us on Market to Market have a great week.


Tags: agriculture commodity prices markets news