As energy index funds buy big portions of agricultural futures, some traders and producers are growing concerned, according to The New York Times. The Commodity Futures Trading Commission recently released a survey showing that index funds control between 20% and 50% of all futures contracts for commodities from corn to live cattle on the major exchanges including New York, Chicago and Kansas City. On the Chicago Mercantile Exchange, for example, funds control 47% of live hog and 36% of live cattle contracts as well as 40% of wheat and 21% of corn contracts. “These are jaw-dropping numbers,” said Dan Basse, president of Chicago-based agricultural researcher AgResources. Agricultural markets typically are less liquid than oil or gas, for example, and analysts warn that the index funds’ interest may increase volatility. The result could be increased prices from the floors of the exchanges to the shelves of local grocery stores. “It will cost everybody, including the consumer,” said Basse. Since 2005, the index commodity market, seen as a high-performing alternative to stocks, has increased from $80 billion to $110 billion. Goldman Sachs is the leader, controlling about $60 billion in commodities indexes, with about 20% of the energy-focused assets it allocated toward agriculture and livestock. The Dow Jones-AIGindex hovers between $30 billion and $40 billion, with about 40% in agricultural futures. “Demand is considerable,” said Eliot Geller, managing director at Jeffries, which has recently entered a joint partnership with Reuters and CRB. John Brynjolfsson, manager of the Pimco$12.1 billion Commodity Real Return Strategy, said that Baby Boomers approaching retirement especially like these high-return funds. Prices for grains, corn and wheat are already at record highs, due to demand for ethanol and transportation costs. The Chicago Board of Trade last week increased the risk capital required to trade corn futures by $338 to $1,215. Livestock has likewise been high. “Everybody is scrambling to understand the implications of the funds’ presence in the market on our ability to manage our risks,” said Gregg Doud, chief economist for the National Cattlemen’s Beef Association. Using the example of the 2003 discovery of a Mad Cow-infected head in Washington that pushed live cattle prices down 16%, he said it’s unclear if the funds would pull out after such an event, and what the effect on retail consumer prices would be. Such concerns led the Commodity Futures Trading Commissionto separate index funds from other traders in weekly commodities reports. The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.
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