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Market Plus: Apr 22, 2005

posted on April 22, 2005

Market Plus: Apr 22, 2005

Pearson: Welcome to the Market Plus page here at our Market to Market Web site. I'm Mark Pearson. With me this week Alan Brugler, one of our regular market analysts. And Alan, you opened up the show talking about soybeans, you talked right away about what the funds were doing. Talk about these funds. The stock exchange has been slow, real estate I think is overpriced and now it looks like money has fallen back into commodities, it has been for the last couple of months and really into last summer. So, these funds, are we talking about people who are just going long commodities willy nilly or what kind of beasts are these funds?

Brugler: Well, there is actually a couple of different kinds. We've got the conventional commodity trading funds that manage money on some kind of discretionary basis. They're still in there but they are very much trend followers, they'll buy heavily and then they'll turn around and sell heavily. That was the problem back in January and February, they had record short positions in many of these commodities. The funds that we're emphasizing so much now are what are called index funds and that money tends to come out of the stock market world. It is managed pension funds, it's big money piles that are sitting there that normally are in equities, they are in stocks, they are in bonds and they are basically not seeing good returns in those asset classes right now. One of the rules in the stock market is sell in May and go away, come back in the fall sometime. So, what do you do with that money in the meantime? Bond market takes a hit whenever the fed raises interest rates. So, they're taking four or five percent of a pile of money and saying let's put that into commodities and try and juice up our returns. This money tends to come in on the long side. They are buying it as an inflation hedge so they're going to come in and just buy assets as long as they are being rewarded for ownership they'll stay in. Some of that is being done through the __________ index, commodity index also called the GUSSY, that particular instrument buys 13 different futures contracts, always buys a front month contract. We've seen the open interest in the June GUSSY jump from 800 contracts to 18,000 contracts in a matter of three days. So, that gives you a feel for the scale that these guys are playing in. The concern, of course, is that if the stock market gets good maybe they'll back that money back out. They talk a very long-term strategy that just is part of a multi-year rally in commodities because the world economy is going to demand those commodities. But a part of it in my mind is just a lack of alternative places to put money right now.

Pearson: Okay, so as long as they are in there and like I say utilizing that GUSSY or those indexes money is going to flow into commodities at various times.

Brugler: And it's supportive to the price. Now, you've got to remember that particularly the GUSSY that money rolls over once a month, you have to sell the May contract to buy the June, they have to sell the June to buy the July and that can create some short-term disruptions in the market depending on how the other participants are placed at the time that happens. But it is generally supportive to commodity prices and it's not necessarily negative to our exports or our other business. If our foreign customers realize that prices are going up next month versus this month they'll just accelerate their buying and we get more of an inflationary spiral going.

Pearson: Let's talk about the beef market real quick. You talked about fed cattle and kind of what you are anticipating and you talked about your cattle crush and that has been working and in fact has actually improved a little bit.

Brugler: Yeah, the cattle crush has been a great concept given the uncertainties that we've got with the border opening and the lawsuits percolating through the system. You can wake up any morning and find out there is a million head of cattle over the next six months coming into the country or conversely that the hearing has been delayed another three months. So, it's just been a peace of mind strategy. We've done either of the crush spreads themselves or a similar version using options which is even more one directional in nature, in other words, as a feeder my risk is that feeder cattle go up before I buy them or that the fat cattle don't go up after I've got the expensive feeder cattle in the lot. So, I'm trying to control both those risks. If I've got $94 cash and the board reacts to that then that is a hedging opportunity for me. But it is very important, I think, because of the choppy nature of the business and the volatility that we have those hedges in place whether they are the crushes or the options.

Pearson: Alright, Alan Brugler, thank you so much. Alan Brugler joining us this week. Lots of things happening in these commodity markets, like to keep you updated here at our Market to Market Web site so be sure to stop by regularly. For all of us here on Market to Market, I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices markets news