Insight: Hedge funds watch their assets grow in grain belt

DEFIANCE, Ohio Wed Aug 24, 2011 1:29pm EDT

Rows of corn bend over a hill in Atalissa, Iowa July 9, 2011. REUTERS/Jessica Rinaldi

Rows of corn bend over a hill in Atalissa, Iowa July 9, 2011.

Credit: Reuters/Jessica Rinaldi

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DEFIANCE, Ohio (Reuters) - Except for the spiffy Hunter rain boots that can cost more than $100 a pair, the fund manager was one with the crowd -- farmers and industry folk in a muddy corn field in the heart of U.S. grain country.

Far from their computers and other gadgets that are the trappings of Wall Street, those in the multi-billion-dollar hedge fund industry are making their way to the corn fields in the midwestern United States in increasing numbers.

This year, a record number of people from the industry are trudging through hundreds of corn and soybean fields to get a firsthand view of the crops -- and their investments -- which have been inundated by excessive rains, flood waters and scorched by above-normal temperatures in July.

The "crop tour", an annual event organized by the Pro Farmer newsletter, kicked off on Monday and will offer its own estimate of this year's crop size on Friday.

"It's important to see the crop," said Adam Tepper, a commodities analyst with ag-focused investment company Arlon Group who was on his second tour.

"It's also just as important to gauge consensus expectations as it is to see the yields themselves," he said.

The tour gives fund representatives easy access to farmers, who have benefited from funds' entry into grain markets nearly a decade ago in the form of high prices.

On the downside, farmers have also seen extreme volatility in grain prices as these deep-pocketed funds move in and out of the markets, often shifting prices by the daily trading limits.

CORN PRICES MORE THAN TRIPLE IN LAST FIVE YEARS

Corn prices have risen 223 percent in the last five years, hitting an all-time high of $7.99-3/4 a bushel in June.

Burgeoning global demand from the livestock and ethanol sectors has contributed to the rally but many also view speculators as being responsible, particularly in 2008 when corn futures surged to a then-record $7.65 despite a U.S. harvest of 12.1 billion bushels, which was the second largest in history at the time.

Tepper brought along his iPad this year on the tour, which projects corn yields and counts soybean pods in seven Midwestern states, using its GPS capabilities to help keep his group on its proper route through gravel roads in rural Ohio.

This year, representatives from nine investment fund companies were on tour, up from three just two years ago.

Investment funds represented include Argonaut Capital, a $2-billion-plus global macro hedge fund group; private equity company Bain Capital; Elliott Management, an estimated $16 billion hedge fund; Mayo Capital Partners; Dialectic Capital; Oppenheimer Funds, an asset management firm with $185 billion under management; and Susquehanna International Group.

The fund representatives, who now account for about 10 percent of the crop scouts on the tour, say the tour can provide valuable lessons about how factors such as drought and flooding affect the commodities that they usually see only as prices on a trading screen.

CROP TOUR AS TRAINING GROUND

"There are many parts of the ag industry that have used the crop tour as a training ground," said Chip Flory, editor of Pro Farmer's newsletter and director of the tour.

"We are more than happy to be a part of filling that role of educating people that are truly interested in learning what they need to know about the ag industry."

Many of the fund representatives have never been in a corn, soybean or wheat field so the tours help them fill the gaps in their knowledge.

Quirky weather around the Midwest, such as wet conditions and late planting in some areas and dry weather and high temperatures in others, also provided a reason to get out from behind desks and into fields, one fund representative said.

Market volatility has risen sharply as the funds have boosted their grains activity, frustrating many traditional ag investors who use futures to hedge physical products and lower their risks for growing, storing and shipping grain.

"The hedge funds are playing the wheat market and they have got somebody out here checking it out," said Ben Handcock, executive vice president of the Wheat Quality Council, which runs two annual tours to survey the hard red winter wheat crop in Kansas and the spring wheat crop in the northern U.S. Plains. "We are seeing more of them for certain."

Since 2006, when the Commodity Futures Trading Commission started releasing separate data on investments by index funds in the grain market, better defining investors described as large speculators that include hedge funds, the noncommercial long in corn has risen to 225,787 futures and options contracts from a short position of 746 contracts. Open interest in Chicago Board of Trade corn futures has risen 98 percent.

The speculators have boosted their net long in CBOT soybeans by 163 percent, with open interest in that commodity rising by 94 percent during the same period.

(Reporting by Mark Weinraub and Karl Plume; Editing by K.T. Arasu and Dale Hudson)

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