April/May 1997
What are "The Funds" in
Today's Grain Markets?
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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.
Chip Flory, senior marketing analyst with Professional Farmers of America, describes funds as pools of money, contributed by individual or corporate investors to brokerage firms, that have money managers who use the fund money to trade in futures markets on behalf of the investors.
These funds are often riskier than other investments, including stocks, but the promise of a quicker, higher return is attractive to investors, says Sue Martin, president of Iowa-based Ag & Investment Services.
Companies that handle funds, such as Merrill Lynch and Refco, have seen a sharp rise in the number of funds traded over the last decade. Market analysts attribute this in part to baby boomers entering a higher-income phase in their lives. Helen Pound, a trader with Goldenberg, Hehmeyer & Co. in Minneapolis, adds that personal computers and up-to-the-minute, electronic market information has made it easier to monitor and respond to futures trading positions.
Funds are prominent in daily market reports because they are generally high-impact, short-term positions by traders who don't specialize in just one commodity, but move money to whichever market looks most profitable on a given day. "A single action by a fund, which may involve hundreds of millions of dollars, can bump a commodity price several cents either way," says Pound.
Growers tend to look kindly on fund activity when it boosts crop prices, but not-so-kindly if funds are responsible for a price slide, say market analysts, who agree that the funds are not "bad guys" who strong-arm market prices to wherever they want them. Rather, funds follow current trends, exaggerating them and causing greater fluctuation in the market. Growers may actually benefit by this added price volatility.
"The more volume or action in the market, the easier it is for growers to trade cash commodities and options," says Mike Krueger, vice president of Agri-Mark, West Fargo, ND. With a great deal of trading going on, smaller traders can make their sales without bringing prices down.
The best way for growers to use funds trading to their advantage is to become familiar with the different funds, and keep a close eye on their movements. Follow the trends and try to sell when fund buying distorts prices in your favor.
Still, keep in mind that funds traders are only speculators, who can lose money, too. "Don't rely so much on the funds' signals that you neglect to follow your own marketing plan," says Neal Plante, a Gentilly, MN grower and market expert.
TOLL-FREE MGE HOTLINE GIVES DAILY MARKET ANALYSIS
Here's a number to have close to the phone: 1-800-827-4746. It's the Minneapolis Grain Exchange trader commentary hotline. Call anytime of day, and you'll hear the recorded voice of an actual grain trader with a timely analysis of the markets. The line is updated daily after the market close, no later than 2:30 p.m. Central Time.