Thursday, December 27, 2007

Stuff you think you know...

But really don't. I am a client of Roach Ag Marketing and his market memo today had this very helpful gem.
Jerry from Iowa asked, “…..perhaps you could explain who the futures buyers/sellers are sometime. My uninformed mind doesn't really grasp who are the speculators and the index funds and the corporations. When you guys buy for us, are you one of the speculators? Other than the agribusiness giants, how much participation does the ag. sector really have in the markets (like when we buy thru you or our elevator)? Is it mostly dominated by financial gurus?”

The CFTC reports the trading activity of 4 different groups each Friday. You can see Friday’s report at: The graph I included in Yesterday’s report shows the two speculative groups reported on each week by the CFTC. One is called “spec funds” and the other is called “index funds.” Speculative funds is not actually the correct name for one of the groups, but many of us use this term. The CFTC actually calls this group “large non-commercial traders” which include funds (professionally managed pools of money similar to an actively managed stock fund in the stock market) and any other large speculative trader with a reportable position size.

The second group the CFTC reports is “commercial traders.” This group consists of commercial grain firms that are hedging their purchase or sales needs. This will include coop elevators, merchandisers, processors, and other users and handlers that have positions that are of a reportable size.

The third group that the CFTC has been reporting on since January is index funds. Index funds are pools of money that are designed to “track or mimic” a specific group of commodities. This would be similar to an index fund in the stock market that tracks a specific stock index such as the Dow Jones index or S & P 500. Each year many of the index funds must rebalance their positions so they have the “correct percentage” of money invested in each commodity. Traders expect index funds to liquidate some of their ownership in wheat and beans early in the New Year while building a larger long position in corn.

The fourth group is made up of everybody that does not have a position of a reportable size. That includes everybody else whether they are hedging or speculating. Most farmers are in this group.
I believe the biggest influence farmers have in the market is their cash selling activity. When a farmer sells, that sale is almost always quickly transferred to the CBOT. Farmers are the only market participant that never buys back (OK occasionally they do) their sale. Farmers need speculative buyers to get high prices, but we hate speculators when they are selling.

A little extra familiarity with this subject could be very, very handy in the years to come, methinks.

[Thanks, John]


Anonymous said...

Please give this guy a good answer!!!

John Phipps said...


The post was mostly just what was in this morning's market advice. Maybe you didn't think Roach's answer was sufficient, but I don't really think I can correct him.

I simply posted it to add some other perspectives.