Hedge funds and commodity investors are turning up the heat in U.S. grain markets, with open interest, volume and prices surging as traders plow money into a sector that has been dull, burdened by an oversupply of crops.
Managers of trend-following funds have flocked to the farm markets as recent advances in crude oil and weakness in the U.S. dollar have encouraged investments in other physical commodities, traders said. In corn and soybeans, they see the potential for volatility and prices to increase from low levels, presenting opportunities for funds to make money.
“The funds are like mosquitoes to a light in the middle of the night when volatility starts spiking,” said Tregg Cronin, market analyst for Halo Commodities in South Dakota.
Money has been flowing into agricultural markets despite the lack of any major changes to the outlook for massive inventories to constrain prices into next year.
Trend followers are not making bets based on supply or demand forecasts, though, said Jim Gerlach, president of brokerage A/C Trading in Indiana. Rather, they’re buying up cheap supplies in hopes of cashing in on high prices later.
“This is more of a mentality change from some of these traders out there looking for value,” he said.
On Wednesday, open interest in soybean futures at the Chicago Board of Trade (CBOT) reached an all-time high of about 860,000 contracts, up 23 percent from a month ago. The record topped the previous high from July 2012, when investors poured money into the grain markets as a severe drought threatened U.S. harvests.
The increase “tells me we pushed a lot of new money into this market,” said Dan Basse, president of Chicago-based agricultural consultancy AgResource.
Trading volumes also exploded on Wednesday, reaching their second-highest levels ever in soybeans and corn.
Soybean futures prices set eight-month highs on Thursday, a day after corn prices reached a four-month peak. The markets have the potential to rally further if bad weather strikes U.S. crops currently being planted.
Traders estimated commodity funds were net buyers of up to 37,000 soybean contracts and 55,000 corn contracts on Tuesday and Wednesday, levels much higher than normal.
The funds could be net long as many as 130,000 soybean contracts after the buying spree, a CBOT floor trader said, up from 34,704 contracts as of April 5.
They have probably reduced a net short position in corn that totaled 216,539 contracts last week.
The U.S. Commodity Futures Trading Commission will give a partial picture on Friday with data on traders’ holdings to April 12.
“It’s been a huge swing in money flow that has distorted the market,” the CBOT trader said.
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