Big changes in the commodity markets over the last 40 years have made marketing a lot more challenging for the average Joe. But there are opportunities for producers who can stay on top of things, according to Carroll Brunthaver, accounts trader for Refco in Memphis, Tenn.
Brunthaver has been in the commodity business for 45 years, serving as president/CEO of Sparks Commodities, Inc., USDA's assistant secretary of agriculture, president of Commodity Credit Corporation, president of the Federal Crop Insurance Corporation and vice president of Cook Industries.
He's seen three major changes in his time:
“In the 1960s, the commercials had a distinct advantage because they traded fundamentals, they knew what the supply was, what the demand was, and it was fairly easy to make money in commodities in those days.
“Later the hedge funds or the pools became much more important. Cook Industries would go to Russia, make a big sale of soybeans, come back here to cover those soybeans and find that there were other people like speculators and pool operators that wanted to buy commodities, too. These pool operators exerted a great deal of influence on the market.”
But nothing compares to the hedge funds we see today, which “are almost dominating the markets that we're interested in.”
Just what do these funds bring to the table?
According to Brunthaver, “In 2000, total hedge funds that wanted to trade futures totaled $40 billion. In 2002, it was $50 billion. Last year, it was $131 billion. In 2005, it's probably in excess of $150 billion.”
Brunthaver noted that pension funds alone in the United States today total $10 trillion. “If 1 percent of that money is interested in trading commodities, that's $100 billion. Of course, they are also trading crude oil, sugar and other commodities, but the point is that there are tremendous amounts of money out there that want to buy commodities today.
“If we take the total open interest in cotton, soybeans, corn and wheat and rice, you get a value of the commodities of approximately $24 billion. You can trade that at 10 percent margin, so that's $2.4 billion against $150 billion of money that's interested in trading if there is an opportunity.”
According to Brunthaver, this is important to commodity producers because occasionally “all this money wants to chase a few commodities. They chase the price up to levels that can be a windfall position for a producer who is really on top of things.
“If you're doing your job — not only producing the commodity, but marketing it — you need to take advantage of these occasional swings that get out of control.”
But remember, “just because prices bid up doesn't mean they're going to stay there. Last year, $10 beans dropped to $6 very quickly.”