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Analysts' forecast of grain prices are subject to error. When faced with such, the embarrassed analysts will surely find some way of excusing themselves. (745 words)

The honest answer would almost always be that inappropriate or no weight was given to some factor that turned out to be critical. The likely answer these days was that it was "the funds." The funds are cable of investing seemingly unlimited resources in the context of agricultural markets and appear to have the sense of direction of a murmuration of starlings.

Typically a market report on a day when prices are up will cite fund buying with the volume seemingly related to the degree by which the markets rise. Conversely on a down day the funds are likely to be seen as the sellers. Even if the funds are known to be a factor, the direction of their influence seems to be random.

Note the funds are always reported to be on one side of the market or the other. This means that there are always conventional trade interests prepared to bet against the funds.

It may be difficult to see the relevance of fund interest that will never consume a loaf of bread, burnt a litre of ethanol or have any contact with, let alone feed, any livestock. The reality is that they create speculative demand when they buy and conversely speculative supply, one would suppose, when they sell.

Do the funds, or indeed any purely speculative, interest serve any purpose? The answer has always been that they provide liquidity in the market thereby facilitating trade by ensuring there are always ready participants on both sides of the market - ready buyers and sellers. Further it plays a role in anticipating demand relative to supply and hence establishing prices that will ration consumption and result in an orderly flow of supplies to the market. Producers have varying preferences as to when they want to sell, and users are unlikely to be able to time their purchasing to match producer selling.

The criticism of funds which is not aimed at conventional speculation is that is perceived to be able to influence price to its own advantage and therefore to the disadvantage of conventional participant. The doubtful premise here is that on days when the funds are credited with boosting prices, they have been able to make their purchases before the market rises. And conversely when they are credited with deflating prices they have been able to sell when the market falls. With the conclusion that they can and have manipulated markets to their own advantage.

Evidence as opposed to supposition about this is scant. The funds themselves are naturally keen to advertize their successes and to hide their failures. But there have been enough high profile failures to suggest that loses are incurred.

Further they do not seem to have detracted from market liquidity as opposed to volume. If they had an unblemished track record, their presence in the market would be a signal for others to take to cover.

Somewhere along the line the funds will learn that agricultural commodity markets are not an assured path to riches and move onto greener pastures - only, of course, to return when the lesson has been forgotten and grain markets appear to be located tat the end of rainbow.

David Walker
September 21, 2008