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Wall Street is betting on the farm

by 5m Editor
19 January 2007, at 8:58am

CHICAGO - Wall Street commodity funds that have been investing heavily in energy futures are now loading up on agricultural commodities like corn and livestock futures.

Livestock prices have been relatively high, driven by high prices for corn and soybeans, the principal feeds for cattle, chickens and hogs.

The flood of investment has raised concerns among grain traders and agricultural producers that speculative money is gaining an undue influence over their markets, which help set the prices of raw commodities for a host of consumer food products.

A recent study by the Commodity Futures Trading Commission, which oversees the nation’s futures markets, has found that Wall Street commodities index funds — investments in futures that track the underlying commodities of a particular index — have a much heavier concentration in agriculture futures markets than many had expected.

The commission found the Wall Street funds control a fifth to a half of the futures contracts for commodities like corn, wheat and live cattle on Chicago, Kansas City and New York exchanges. On the Chicago exchanges, for example, the funds make up 47 percent of long-term contracts for live hog futures, 40 percent in wheat, 36 percent in live cattle and 21 percent in corn.

“These are jaw-dropping numbers,” said Dan Basse, president of AgResources, an agricultural research firm in Chicago. “We have seen this explosion of open interest in agricultural commodity trading, and now we know it is largely related to the commodity index funds.”

The index funds may be stoking volatility, traders and analysts say, because the agricultural markets tend to be far less liquid than other commodity markets, like energy. Such volatility could lead to higher prices for buyers and sellers of agricultural commodities, including food at the grocery store.

Investors have flocked to invest in commodities, drawn to an alternative to stocks and one whose returns in the last five years have been outstanding. Industry analysts estimate the index commodity market is about $100 billion to $110 billion, up from $80 billion in 2005.

Source: The New York Times

5m Editor