Credit crunch panic pounds commodities
SAM NELSON
Monday, March 17, 2008
CHICAGO — Fears of a growing credit crunch spread panic in U.S. grains and other commodity markets Monday as the stunning collapse of Bear Stearns raised questions over the financial health of investment funds that have driven these markets to historic highs.
Bear Stearns, the fifth-largest U.S. investment bank and a player in the subprime mortgage collapse, was bought by JP Morgan Chase over the weekend at a fire-sale price of $2 (U.S.) per share – far below the company's closing share price of $30.85 Friday.
“We're going down with everything else,” a Chicago Board of Trade trader said, referring to the grains market. “It's just a debacle the way some hedge funds were leveraged, and it's the banks' fault for loaning them the money.”
Shares of MF Global, one of the world's largest futures and options brokers, fell as much as 70 per cent Monday on speculation the firm had liquidity problems. MF Global said it had $1.4-billion in committed, undrawn credit lines and no exposure to subprime mortgage-backed securities.
The U.S. Federal Reserve held an emergency meeting over the weekend to gear up for a deep cut in interest rates, scaring market players across the globe.
“There are waves of selling taking place across the whole commodities arena as people try to adapt to the lower exchange rate and the shaken confidence in the equities market as well,” said Gavin Maguire, analyst for Iowa Grain.
Investment funds had been buying huge chunks of grain futures and other commodities over the past couple of years on a perceived flight to quality and a hedge against inflation.
That buying spree escalated early in 2008, driving prices to record-high levels.
“Mostly it's just spec selling, fund selling related to the economic news that the Fed had to cut interest rates another quarter per cent. After the news came out this morning, we took another chunk out of just about all commodities markets,” said Jack Scoville, analyst for the Price Futures Group.
Each market had been laden with a huge number of speculative long positions, leaving the market vulnerable to a sharp retreat in the event of a financial reversal.
“That's the dominant concern, the financials and the Bear Stearns fallout,” said Mario Balletto, analyst for Citigroup.
Several hedge funds already began cashing out of the grains markets last week, taking profits ahead of what is now being referred to as a major financial meltdown.
“I don't have any idea how much, but some of them are liquidating. I don't think it's huge ... it's more a liquidity issue than anything,” said Paul Haugens, vice-president of Newedge Trading.
Friday's Commodity Futures Trading Commission commitments of traders report showed that as of last Tuesday large speculators reduced their long holdings of corn by nearly 16,000 contracts and soybeans by more than 11,000 contracts. They were net sellers of wheat by just over 3,000 contracts.
“The CFTC report will show you there was some liquidation last week,” Mr. Haugens said.
The unfolding credit crunch is not just about hedge funds since banks and other lenders have been squeezed by subprime woes. Even multinational grain firms like Archer Daniels Midland Co., Cargill Inc. and Bunge Ltd. need more collateral, traders said.
“It's all financials, financials, financials and what it means. I think these markets have become very dysfunctional, it's going to chase everybody away and then you have no liquidity,” said Roy Huckabay, analyst for The Linn Group.
Bear Stearns may have had only light if any direct involvement in the grain markets but some funds were selling their long holdings in grains and other commodities because of fears the credit crunch may spread.
“There is more at work in the grain markets than any fundamentals. The only thing up is gold, and everything else is tanking,” a trader said.
Crude oil markets plunged roughly $5 per barrel Monday from the record highs and the NYMEX spot April crude futures contract swung in a massive range of almost $7 per barrel.
Corn and soyoil markets have been closely following the trends in crude oil because of the growing influence that energy markets are having on the ethanol and biodiesel industries.
“If there is no new money coming in to buy grains then we'll go down. People are just panicking, and we had an inkling Friday of what was coming,” a trader said.
When word of Bear Stearns' troubles surfaced Friday, grain markets began plunging. The Chicago Board of Trade soybean market fell its daily 50 cent per bushel trading limit and was limit-down again Monday.
CBOT soybean prices have tumbled almost 20 per cent since the record high for a spot month of $15.71 was set one week ago.
“There is more at work in the grain markets than any fundamentals. The only thing up is gold, and everything else is tanking,” a trader said.
New York April gold futures rose to a record high of $1,033.90 per ounce early but later began to fall.
© Copyright The Globe and Mail
|
