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The Latest on Hedge Funds

00:00AM Sep 05, 2008

Julianne Johnston Pro Farmer Senior Markets Editor

From Pro Farmer

Updated as of 7:00 a.m. CT

Hedge funds are 'wrong side' of market... Since riding the coattails on the rise to record commodity prices, commodity hedge fund managers are faced with a completely different set of circumstances. This week Ospraie Management disclosed it lost about $3 billion of the roughly $7 billion it manages due to increased volatility in energy, mining and natural resources stocks.

But they aren't the only hedge fund in trouble. According to data from Hedge Fund Research (HRF), as many at 679 hedge funds may be forced into liquidation this year -- a failure of about 70%.

So what could this mean to the commodity markets? The answer isn't easy, because commodity markets can make an about-face at any moment in response to market fundamentals (supply or demand disruptions, for example). But it does suggest momentum has turned. What was once thought of as "easy money" is now becoming more difficult. If hedge fund money continues to come out of commodities, it takes out a major source of investment in the long side of these markets.

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Opening calls. These calls originate more than three hours before the open -- use caution, things change::

Corn: 12 to 14 cents lower. Futures were sharply lower overnight on spillover from strength in the dollar. Futures posted a choppy day of trade and didn't stray too far from unchanged yesterday. All week, futures have hovered near the middle of the August trading range, signaling the market has developed a "wait-and-see" attitude ahead of the September Crop Production Report, which will be released next Friday.

Soybeans: 30 to 37 cents lower. Futures were sharply lower overnight on spillover pressure from weakness in the crude oil market. Futures posted a low-range close yesterday, finishing 16 to 17 cents lower. Pressure yesterday came from outside markets, as crude oil was lower on liquidation pressure while the dollar posted strong gains on concerns the global economy is weakening.

Wheat: 23 to 26 cents higher. Futures were lower overnight on spillover from neighboring pits and outside markets. Chicago wheat closed slightly higher yesterday, seeing a narrowly traded session. Upside potential was limited by strength in the dollar, which was supported by concerns about further global economic slowdowns. Ideas the wheat market has overdone the downside have resulted in some short-covering support as traders reevaluate positions.

Cash cattle expectations: Nebraska trades lower. Cash cattle trade got underway Thursday afternoon in Nebraska at $1 to $2 lower prices than the previous week. No cash sales were reported in Kansas and Texas as of late afternoon. Despite the lower Nebraska prices, cash sources continue to expect steady to possibly $1 higher trade in the $99 to $100 range in Kansas and Texas.

Futures call: Mixed. Another choppy day of trade is possible as traders wait on active cash trade to develop. December live cattle traded on both sides of unchanged before closing 17 cents lower -- near opening levels. In early trade, futures violated support to post a new-for-the-move low. Support lies at the late- February/early Mary high of $104.90.

Cash hog expectations: Steady, mixed undertones. The pork cutout value was down another 72 cents Thursday to continue the heavy price pressure seen over the past couple of weeks. If there's a silver lining in this price plunge it's that product movement has turned strong, which suggests pork prices may have dipped far enough where value buying is starting to be seen. But concerns with export demand continue to hang over the market.

Futures call: Mixed. Futures are called mixed as traders continue to reevaluate positions. Nearbys have sharply reduced the discount they hold to the cash index recently. October hogs hold around a $5.40 discount to the index, which is a huge improvement from the $15-plus discount the contract held in late August. December hogs did some more technical damage on yesterday's slip through support to post a fresh weekly low. The contract is nearing support at the March low of $68.20.