March 27, 2008 / 7:48 PM / 12 years ago

Hedge funds raise profile in U.S. grain business

CHICAGO (Reuters) - The presence of hedge funds in the U.S. agricultural sector expanded on Thursday with the sale of ConAgra Foods Inc’s (CAG.N) grain business to Ospraie, as speculators increasingly tie their futures trades to physical markets.

Trade sources said the sale was also a sign of tough times for grain companies which must find ways to protect against wild swings in the futures market and raise extra money for margin calls due to a credit crunch.

ConAgra said earlier Thursday it would sell its commodity trading and merchandising operations to Ospraie Special Opportunities fund, an affiliate of investment management firm Ospraie Management.

ConAgra’s chief executive said the sale would allow the Omaha, Nebraska-based company to focus on its core food operations and address investor concerns over the long-term volatility of the trading business.

In the past, hedge funds have typically restricted their involvement with commodities to speculation in the futures market. Funds have been notorious for buying and selling huge chunks of various futures contracts within a short time frame as opposed to index funds which are noted for investing for the long haul.

The ConAgra deal illustrates how some funds now seek a presence in the physical commodities markets in order to make more well-informed trades.

John Duryea, who manages the Ospraie Special Opportunities fund, told Reuters in an interview: “The combination of ownership and trading of commodity assets is very important and is a powerful business model.”

Grain traders said Ospraie was expected to play a big role in trading grains in the cash market.

“By getting into the physical market, they will be able to get better information on fundamentals that they can use to trade in futures ... instead of just speculating,” a cash grain trader, who declined to be named, said. “They can find out what’s really going on in the physical market.”

At the same time, some grain traders said it was unfortunate that a venerable food company like ConAgra has chosen to exit the cash grain market.

“It’s regrettable the cash grain trade is losing ConAgra,” said veteran cash grains merchandiser and futures merchant Glenn Hollander of Chicago-based Hollander & Feuerhaken.

“With the volatility we have in the markets it’s been harder and harder to manage risk, and I hope this is not a trend but an isolated case,” he said on the trading floor of the Chicago Board of Trade, the world’s largest grain exchange.

A Chicago futures trader who handles orders for a major U.S. commercial said now that a trend for hedge funds to own physical grain facilities has been established, there is no turning back.

“It shows a trend in the business with hedge funds getting into the grain business — Whitebox was the first and now Ospraie,” he said.

Whitebox Advisors LLC, a hedge fund, bought a Minnesota grain elevator from agribusiness giant Cargill Inc early this year in a deal which also raised eyebrows.

ConAgra reported huge quarterly profits earlier on Thursday. The new business will be renamed Gavilon LLC.

“They (ConAgra) can control risk better now that they’re just in the food business,” the grains trader said.

New York-based Ospraie started its Special Opportunities fund to buy commodity producers. Late last year, Ospraie was reported to be the world’s biggest commodities hedge fund firm, with $9 billion under management.

Additional reporting by Brad Dorfman and K.T. Arasu in Chicago, and Svea Herbst-Bayliss in Boston, editing by Matthew Lewis

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