People love to hate hedge funds, but oat growers are getting used to loving one hedge fund that has thrown a lifeline to their industry.
At the recent Prairie Oat Growers Convention in Brandon, Riverland Agriculture president Don Grambsch took the lid off of Whitebox Commodity Holdings Corp., and explained why the company thought oat storage in the U.S. Midwest was a good investment.
“We’re interested in the carrying charges in the market and maintaining the pipeline to the marketplace,” said Grambsch in a presentation.
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Whitebox, through its wholly owned Riverland Agriculture subsidiary, has attained a high profile in the oat industry after buying a network of grain elevators in the Minneapolis-Duluth region in 2006-07.
The area is the delivery region for the Chicago oat contract.
It used those elevators to store 300,000 tonnes of oats it bought in 2008 and continues to use them to collect carry charges created by the Chicago oat futures contract.
Riverland also owns other agricultural interests, including a major stake in Canterra Seeds.
In his presentation and an interview, Grambsch said that oats has become a specialty grain compared to corn, soybeans and wheat.
The big grain companies don’t like dealing with oats because it’s a low-volume crop and that has undermined the oats storage system.
High carrying charges in the Chicago futures market, generally standing about 5.5 cents per month for full carry including interest, allow for a healthy profit on storing oats, but major grain companies don’t consider it worth their while.
On the other hand, huge millers like General Mills have large storage systems, but seldom store more oats than they need, except occasionally when they have done so to capitalize on particularly large carrying charges.
That left a large gap in the oat system that Whitebox exploited. It bought elevators in a number of U.S. states and used them to store oats and other small volume commodities, such as distilling rye, malting barley – crops the big grain handling companies don’t bother with, but for which there is a healthy demand and no easy substitutes.
People may imagine a hedge-fund-owned agriculture company to be a beehive of fast and sophisticated trading strategies, but Grambsch said the opposite is true: they run their system mainly for the storage charges and only trade around the edges.
“We’re not a high frequency trading shop at all,” said Grambsch.
In an interview, OatInsight analyst Randy Strychar said most people in the oat industry are happy with Whitebox’s entry into the business because it has provided critical infrastructure.
“What surprises me is that nobody thought of this before,” said Strychar.
Grambsch told oat growers that his company’s move into the grain business – the first asset-based grain company to be set up in the Midwest since the 1950s – should help farmers who want to grow oats.
“Everybody with assets, including your assets … benefits from the fact that we sustain a pipeline into the delivery mechanism that promotes effective price discovery, underpins the liquidity of the futures,” said Grambsch.
He said the lack of a player like Whitebox is a reason Winnipeg’s feed barley contract doesn’t work.
“Winnipeg feed barley futures are illiquid to say the least, and are really not a viable way to price feed barley,” said Grambsch.
“Part of (the problem) is there’s no Whitebox, General Mills or Cargill to make (it work).”
