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Hedge Funds Join Grains Boom
posted by admin on 26/02/07

Hedge funds may start taking a bigger role in the booming grains markets.

Following an unusual sale of two grain elevators to a hedge fund recently, industry members say other funds that trade agricultural-commodity futures may start adding physical assets, such as grain elevators, ethanol plants and farms, to their portfolios.

By controlling the operations of elevators and other assets, these lightly regulated investment vehicles may be able to affect price movements at the Chicago Board of Trade, where contracts from corn to wheat are traded, some say.

Hedge funds and other nontraditional market participants have begun trading grains recently as investors seek investments that aren't correlated to traditional stock and bond markets. Grain prices have surged during the past year, with corn and wheat prices at one point at 10-year highs.

"If hedge funds have a delivery mechanism of physical products, it may give them an advantage in trading," says Brad Cole, president of Cole Asset Management, a Chicago-based manager of a fund of hedge funds focused on the natural-resources sector.

But some say hedge funds may see such holdings as a passive investment that reflects their growing interest in commodity markets, rather than a way to influence prices. They note that the reality of running operations at an elevator or other physical asset could deter many hedge funds from purchases.

Packaged-food maker ConAgra Foods Inc. this month confirmed it had sold two grain elevators in Minnesota, and people familiar with the matter said the buyer was a Minneapolis-based hedge fund, Whitebox Advisors LLC. Whitebox Advisors declined to comment on the buyer. A ConAgra spokeswoman said the elevators sold by the company were used to store rye, which isn't traded at the CBOT, but declined to comment on the buyer.

Big agriculture and food companies have long benefited from owning and operating grain elevators. Starting in the late 19th century, companies like General Mills began buying local grain elevators and building facilities as a way to maintain better control of their supplies, says Bruce Selyem, founder of the Country Grain Elevator Historical Society.

Among assets that hedge funds could buy, ethanol plants, in particular, may be easy targets, industry members say. Many are owned by cooperatives of local farmers who might find it hard to refuse buyout offers from funds with millions of dollars at their disposal, they note.

Corn prices have surged over the past year, in part because of rising demand to turn it into ethanol. Friday, the March corn contract on the CBOT settled 4.25 cents lower at $4.3025 a bushel, but it was nearly double the $2.2775 close for March corn a year ago.

Others, however, argue that owners of these plants may resist bids from outsiders and fight to maintain their locally owned status. Also, the funds would need to assume actual responsibility for operations, says Sol Waksman, president of Barclay Group, an Iowa firm that collects performance data about more than 6,000 hedge funds and managed futures funds.


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