Professional speculators are stirring up agricultural markets like never before as they look for risky but potentially rewarding moves in futures trading pits.
These days, farmers can’t help but run into the term “fund activity” in markets reports.
Commodity funds are pools of money run by a manager attempting to get returns for investors. It’s an investment vehicle on the other side of the rainbow from Canada Savings Bonds, looking for a much bigger pot of gold.
“There’s probably as much money in commodity funds as there is Canadian debt,” said Errol Anderson, analyst with Pro Market Wire in Calgary.
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Funds can be a double-edged sword in the markets. They improve liquidity, so it’s easier to place an order to buy or sell futures contracts without moving the market.
But Mike Jubinville, analyst with ProFarmer in Winnipeg, notes fund activity makes markets more volatile.
When funds buy a futures contract en masse, they can push the price higher than what economists might deem the true value of the commodity.
Recently, farmers saw the value of nearby canola futures contracts rise over $400 per tonne. Anderson said the price isn’t completely based on supply and demand.
He figures speculative buying in the Winnipeg canola pit and Chicago soybean, meal and oil pits gave farmers an extra 50 cents a bushel.
“The farmer had a chance to sell canola over $9 per bushel and it wasn’t because of world demand, it was really because of this fund activity,” Anderson said.
But when the funds sell, markets can plummet, noted Kenneth Matchett, chief executive officer of Xcan Grain Pool Ltd.
At a Manitoba Pool Elevators meeting last month, Matchett explained to farmers that funds are exploring commodity markets more because of recent “uncertainty and volatility” in world stock markets.
Anderson said changes in regulations a few years ago allowed funds to diversify into futures markets. They trade anything that appears to be moving up, he said, from orange juice to pork bellies to currencies or bonds.
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He estimates 90 percent of the trade on the floor of the Chicago Board of Trade, the largest futures exchange in the world, is related to commodity funds.
More than 800 funds trade in Chicago, he said. Most lose money. And most of the business is done by 10 funds or fewer, he said.
Funds run by Griffin Capital Management Corp. Tudor Investment Corp., Refco Group Ltd., or Rosenthal Collins Group, L.P. are particularly influential.
“When those managers go to the pit, everybody looks,” said Anderson.
Funds occasionally bring business to the canola pits at the Winnipeg Commodity Exchange, improving liquidity but making for some wild price rides.
“The backlash you can get from the funds liquidating their positions can be quite dramatic,” said Jubinville.
