“Everybody got run over by the bus going east. They got up only to be run over by the bus going west.”
– CME TRADER GARY LARK
From his desk alongside the Chicago Mercantile Exchange (CME) trading floor, Jim Brooks is seeing more ill-tempered cattle and hog traders nowadays as they cope with fast-moving markets that have lost many of them money.
“Tempers are a little shorter and emotions are more frantic. You definitely feel that,” said Brooks, who oversees floor operations for R. J. O’Brien Futures. “This market is starting to take a toll on some people.”
That toll has been caused by the whipsaw action in commodities, which had traders struggling to get on board when commodity prices shot higher this summer and later rushing to get out when prices tumbled.
Many lost money and others are still losing more. This has led to traders getting out or scaling down their trading practices. The larger players, primarily investment funds, may not be coming back.
“We drove a lot of people out of the market because they could not afford to play,” Paul Haugens, vice-president of the Chicago brokerage Newedge USA, said of this year’s surge in Chicago Board of Trade (CBOT) grains market. “Now we are not getting them back. They are beat up.”
This exodus has been evident in the sharp decline in the open interest, a measure of traders using the markets, on the exchanges across the board since the summer.
As of Dec. 9, open interest is down 33 per cent in CBOT grain markets and in CME live cattle and down 35 per cent in CME hogs.
Open interest in crude oil is down 22 per cent from May, while gold is down 42 per cent and copper is down 31 per cent in that time, according to the Commodity Futures Trading Commission.
“I think the bulk of the open interest decline has been related to the exit of the index funds and hedge funds from the market,” said Rich Feltes, senior vice-president at MF Global.
A few months ago, commodities of all types were the darlings of these wealthy investment funds, which poured cash into crude oil, cattle, corn, copper and others.
“They were like drunken sailors, they could not stand to have the money in their pockets,” Gary Lark, a 30-year veteran of the CME livestock markets, said of the rush to buy.
That heyday appears to be over. “I don’t think they are going to be coming back for a while,” Feltes said of the funds. “I think they have been stung by the betrayal of the trading adage that commodities trade inversely proportional to equities.”
This crash in commodities has sent smaller traders moving to the sidelines as well.
“I think everybody is totally shell-shocked,” said Lark. “Everybody got run over by the bus going east. They got up only to be run over by the bus going west.”
Hog traders still caught
For instance, in the CME’s hog market, traders are still long the June 2009 hog contract, said Wilson Cipolla, a longtime hog trader with ADM Investor Services.
These traders bought on ideas the high feed grain prices early this year would have producers feeding fewer hogs, thus driving up hog prices.
However, corn prices came crashing down a few months later amid forecasts for a bumper U. S. crop. Hog prices came down as well, stranding these traders with money-losing positions.
“There were an awful lot of sharp guys who bought June hogs figuring prices would go higher,” said Cipolla. “It is a blood bath; they can’t get out.”
Similar tales can be found in the cattle pit, at the nearby Chicago grain markets, in Winnipeg where canola and barley are traded, and in New York, where crude oil, gold and other commodities trade.
“We have had just a massive meltdown here. Everybody got on the same side of the boat. Everybody was long and wrong,” said Keith Ferley, a Winnipeg commodity broker for Union Securities. “I think we are at the point now where participants have moved to the sidelines in disbelief.”
In New York, crude oil topped $140 a barrel in July as funds and speculators poured bought on the belief that demand by China and India would reduce supplies. However, souring economies worldwide and an aversion to $4-per-gallon gas by U. S. motorists slashed demand, and crude came tumbling down to about $40 (all figures US$).
– Additional reporting for Reuters by Barani Krishnan