Hard-hit grains lose allure to fund investors

CHICAGO (Reuters) - The global economic turmoil that has cost banks billions of dollars in losses and slammed hedge funds has dimmed the appeal of grains as an asset class, with fundamentals for corn and wheat pointing to lower prices.

Lately, supply and demand factors have been playing a greater role in determining grain prices than they did during the past two years when grains gyrated with moves in the stock, crude oil and gold markets, traders and analysts noted.

"We're starting to pay closer attention to grain fundamentals but we're not going to totally ignore what's happening in the outside markets," said Shawn McCambridge, analyst for Prudential Bache Commodities.

"But it's going to take a sharp shift in the outside markets, a sharp move either higher or lower to influence the grain markets the way they have in the past," he added.

U.S. wheat, corn and soybean prices soared to record highs earlier this year as large investment funds bought grains, and as crude oil surged to a record high above $147 per barrel.

Buyers included highly leveraged hedge funds known for their prowess in short-term trades and index funds that purchase for the long haul. Many were funded by investment banks that folded as the mortgage and credit markets suffered.

Since record highs were hit, prices in each market have fallen about 50 to 60 percent as funds liquidated long holdings to cover margin calls and pay off debts during the worst global financial crisis in 80 years.

"The funds aren't in here to buy anything, let alone corn, and we could be going back to a more fundamental market based on supply and demand," said Joe Bedore, Chicago trading floor manager for trade house FC Stone.

"The biggest bullish news we've had over the past year is fund buying and they aren't in here now," he said.

ERA OF FUNDS PROPPING UP GRAINS OVER?

Corn and soybean prices had surged amid fund buying on euphoria over the rapid growth of the alternative green fuels ethanol and biodiesel. The worst flooding in 15 years in June swept through U.S. corn and soy country, bringing in another batch of fund buying.

"I think fundamentals are coming back and will now be playing a bigger part in the market," said Paul Haugens, vice-president of Newedge USA.

"Spec money will always be in here and it's an important part of the market but I don't think we'll see any more of that spec buying of everything no matter what."

The Dow Jones industrial average has fallen 40 percent from its record high of over 14,000 a little over a year ago.

Grains analysts and traders cited the potential for further declines in grain prices as more economies enter into recession.

"It wouldn't surprise me to see wheat dropping another $1.50 (a bushel) and corn another $1.00. We can't export much of anything, especially soft red winter wheat...there's too much wheat in the world," a wheat trader said.

Benchmark Chicago Board of Trade December wheat futures were trading around $5.30 per bushel on Tuesday and December corn was about $3.80 per bushel. January Chicago soybean futures were just under $9.00 per bushel.

"Corn is in trouble and whether that's because there is so much feed wheat available I don't know. If the demand for corn doesn't pick up we could go below $3.00, Bedore said.

CBOT corn futures have not traded below that level since mid-October 2006.

Corn production in the United States this year has been pegged at just over 12.0 billion bushels, the second largest crop ever. The U.S. government has said surplus at the end of next year would be more than a billion bushels of corn.

But if demand for corn keeps waning, the carryout could exceed that level and keep pressuring corn prices.

"You can't rally corn if there's no demand," Bedore said.

The U.S. Department of Agriculture said in its November crop report that rising world coarse grain supplies and reduced prospects for global feeding are expected to pressure U.S. feed grain prices.

Analysts said the soybean market would attempt to move higher because the supply of soy is expected to keep shrinking as global demand for oilseeds keeps outrunning production.

"Beans are trying to hold steady because they have different story to tell but corn and wheat price outlooks are horrible," Haugens said.

(Reporting by Sam Nelson; Editing by David Gregorio)