Hard-hit grains lose allure to fund investors

By Sam Nelson - Analysis

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.