Hedge funds, EPA proposed ruling could affect market prices

By Nicholas Zeman | April 15, 2009
Posted May 7, 2009

It has been said that hedge funds positions in the commodities markets essentially disappeared after the September crash, but speculative activity is starting to pick up again, which could affect the price of soybeans. "They're not seeing good returns with stocks, they're not big on bonds…real estate's out…so the hedge guys are viewing energy with an inflation mentality," said Jerry Gidel of North American Risk Management Services in Chicago.

"Don't get me wrong, there's definitely been a decline in hedge fund participation compared to last year, but since things totally bottomed out we've seen traders starting to come back in," Gidel said.

Even with this renewed interest, however, those crop sectors affected by biofuels demand may take a hit since the U.S. EPA established proposed parameters for RFS2. At least some commodity market enthusiasm for beans has evaporated since soybean oil's role as a biofuel feedstock may be limited.

"In order to meet the GHG threshold of 50 percent for biomass-based diesel, a biodiesel production facility would need to use a minimum of 48 percent waste grease and a maximum of 52 percent soybean oil," the EPA report stated in projecting the impact of its proposed rule. "Thus, a pathway that would allow a biodiesel production facility to designate all of its biodiesel as biomass-based diesel would include a requirement that the producer demonstrate that every batch has been produced from no less than 48 percent waste grease and no more than 52 percent soybean oil."
The publication of the proposed rule has already an impact on trading. "There were a lot of sell signals on Monday and Tuesday for soybeans-I assume in relation to the EPA rule-so I don't think it's been a good week for prices," said Ernie Goss, professor of economics at Creighton University in Omaha, Neb.

Markets don't like uncertainty and what essentially amounts to putting a cap on soybean demand from the biodiesel industry will have unknown effects on future and spot prices. "Politics can be even more volatile than markets and who's to say that some of these rules won't change after the next election, so nobody really knows what's going to happen," Goss said. "When you live by the government's sword, you can also die by it."
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