As I watch investment commentators on Fox News Network and CNBC I am amazed at how much more commentary I'm getting each year on the commodity markets.
As investment guru and former George Soros investment partner Jim Rogers is quick to point out, commodities have out-performed the stock market since 1999. His Rogers fund index made a lot more money in 2005 than the S&P index or any of the traditional bond funds.
As the chart below shows, the amount of money entering the commodity markets has gone from $20 billion to more than $130 billion in the last 10 years. Several new commodity funds have been introduced in the first quarter of 2006.
Let's first evaluate what types of funds are entering the futures markets and how they trade. The money that's entering the commodity markets is about evenly split between index funds and hedge funds. The index investors tend to be long only with a huge number of buyers coming into the market right after the start of the year. The expectation of this money coming in and then the actual buying was the fuel behind the corn and soybean rally into the early January 2006 high.
The other investment money is from the hedge fund traders. This group tends to trend followers and will trade long or short depending on their trend analysis.
Many of the hedge fund traders were buyers early in the year, and that combination of index and hedge fund buying was positive in the short term for the corn, soybean and wheat markets. This buying combination created a larger buying quantity of commodity futures contracts than commercial hedge-sell orders in the first week of 2006. When prices turned lower, the hedge fund traders quickly went from holding large long positions to selling out their long positions and then going short in the futures market. This created some extremely choppy, volatile commodity markets.
Lately the movement of index and hedge fund money has been the dominant day-to-day key market fundamental. The overall long-term influence of all this money is neither bullish nor bearish. All of the purchases of commodity futures will eventually have to be re-sold. These firms don't process or export the commodities they trade. So the real impact is that they create a lot more volatility, as they tend to buy on strength and then sell on weakness. This creates higher highs and lower lows.
How should the entry of this new group of fund and investment traders impact how you market your crops?
First, you should write out your marketing plan. If corn prices are moving in a 3-5¢ trading range each day and soybean futures swing by 8-12¢ each day from January to March, odds are good we may see some huge inter-day swings this summer when you add in the weather traders. That will create some very emotional, volatile days when it's harder to make logical decisions. This is a great time of year to write out your plan.
Second, make a series of smaller sales. A lot of my customers used to make one to two new crop sales of 20-40% of their projected crop. With the increase in volatility, it probably makes more sense to make six to eight sales of 5-10%.
Third, when you know where you want to sell, call in your offers. You not only have to have a plan, but execute that plan. For the disciplined farm marketer the larger price swings create more pricing opportunities.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want information, write:Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: [email protected] .