Commodity funds often get blamed, or credited, for large fluctuations in futures prices.
That happened recently, when canola prices plunged and then rapidly recovered, and analysts said the gyrations were due to the funds jumping on price movements in the market and making them become extreme.
But what are these mysterious funds and what effect do they have on the price farmers get for their crops?
Ken Ball, a commodity trader with Benson Quinn GMS, said commodity funds are similar to but not the same as mutual funds. Many funds use money from a wide array of investors to trade futures, hoping to profit from selling high and buying low.
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“This is out and out speculation,” said Ball.
Unlike farmers, grain companies and processors, which use futures markets to hedge their risks, speculators never plan to have grain in their hands. They just want to benefit from market gyrations.
Not all commodity funds are open to the public. Some are private funds with a restricted number of owners.
Others are not commodity funds at all, but simply a large amount of money controlled by a single investor, but referred to as a “fund” because of the sheer size of the investments.
Funds are not interested in the fundamentals of the marketplace – the supply and demand factors that dominate the thinking of hedgers.
Funds base their trading decisions on technical indicators, using moving averages to reveal which way the market may be heading.
“Very few of them want any fundamental analysis,” said Ball.
“By definition they are under the assumption that fundamentals (have already shown themselves) in the prices.”
Since almost all funds analyze the market by following price averages and other average measurements, they often all react together when the price changes. That can cause big fluctuations.
“You can get these trigger points where the market will make a sudden move and trigger dozens and dozens and dozens of funds into buying and selling,” said Ball.
That happened recently when a brief flurry of farmer selling of canola triggered commodity funds to all start selling. Their analysis indicated the market was beginning a substantial fall. They sold expecting to buy back the positions at a lower price, thereby producing a profit.
The price plunged until the commodity funds stopped selling. The funds then turned around and started buying, causing the price to soar on Jan. 24.
Farmers may be suspicious of the funds, said Errol Anderson of Pro Market Communications, but they should thank them for creating market spikes that wouldn’t happen otherwise.
“At times farmers have gotten far higher prices than they really should have,” said Anderson.
“When markets are raging higher, they’ll push prices far beyond their true value.”
When prices drop, the opposite is true, he said.
Ball said such volatility can be unsettling if it seems erratic but if funds follow the pattern of jumping on price trends and exaggerating them, then farmers can take advantage.
“Fluctuations create extremes, and extremes create opportunities in our business,” said Ball.
But farmers should realize that the funds only play a short-term role.
They do not affect long-term price trends. Fund activity won’t drive a market permanently higher, but it will help spark rallies that farmers can use to capture price spikes, Anderson said.
