Wheat Price Falls to 16-Month Low as Traders Sell to Raise Cash

By Tony C. Dreibus

Oct. 24 (Bloomberg) -- Wheat extended a decline to a 16- month low as investors sold commodities to raise capital during a plunge in world equity markets.

Overnight trading of futures on the Standard and Poor's 500 Index were limited to prevent contracts from falling more than 6 percent. Equities have plunged on concern a deepening global economic slump will hurt company earnings. In the past three months, the stock benchmark has fallen 30 percent, and wheat has dropped 34 percent.

``The equity markets and what's going on over there, that's going to trump anything fundamental,'' said Jason Britt, president of Central States Commodities in Kansas City, Missouri. ``The issue is preservation of capital or getting down in risk, which is what everybody wants to do. That means selling, and people wanting to get small.''

Wheat futures for December delivery fell 6.75 cents, or 1.3 percent, to $5.1625 a bushel on the Chicago Board of Trade. Earlier, the price touched $4.965, the lowest since May 30, 2007. Wheat has plummeted 62 percent from a record $13.495 on Feb. 27.

The Reuters/Jefferies CRB Index of 19 raw materials tumbled 9.3 percent this week and is down 46 percent from a record in July.

Some investors who held long wheat positions, or bet prices would rise, are selling wheat contracts instead of boosting payments, known as margin calls, to maintain holdings obtained using borrowed money, Britt said.

``The margin clerk is in control,'' Britt said. ``Whether it be the pension-fund money or index-fund money, all these funds that have been trading commodities are getting out.''

Retain Holdings

Still, hedge funds and long-only index funds won't sell all their commodity holdings, he said.

``Is all that money going to come out of commodities and not going to be any hedge funds left? No,'' Britt said. ``But too much money ran into the commodities that shouldn't have been there. They were sold on the idea of diversification, and in this environment, capital is being destroyed.''

Hedge-fund managers and other large speculators increased their net-short position in Chicago wheat futures in the week ended Oct. 21, Commodity Futures Trading Commission data showed after the CBOT closed.

Speculative short positions, or bets prices will fall, outnumbered long positions by 17,010 contracts. Net-short positions rose by 2,872 contracts, or 20 percent, from a week earlier.

Wheat is the fourth-biggest U.S. crop, valued at $13.7 billion in 2007, behind corn, soybeans and hay, government data show.

To contact the reporter on this story: Tony C. Dreibus in Chicago at Tdreibus@bloomberg.net.