FEATURE-Commodity traders grow weary of market swings

CHICAGO (Reuters) - From his desk alongside the Chicago Mercantile Exchange (nyse: CME - news - people ) trading floor, Jim Brooks is seeing more ill tempered cattle and hog traders nowadays as they cope with fast moving markets that has lost many of them money.
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"Tempers are a little shorter and emotions are more frantic. You definitely feel that," said Brooks, who oversees floor operations for R.J. O'Brien Futures. "This market is starting to take a toll on some people."

That toll has been caused by the whipsaw action in commodities, which had traders struggling to get on board when commodity prices shot higher this summer and later rushing to get out when prices tumbled.

Many lost money and others are still losing more. This has led to traders getting out or scaling down their trading practices. The larger players, primarily investment funds, may not be coming back.

"We drove a lot of people out of the market because they could not afford to play," Paul Haugens, vice president of the Chicago brokerage Newedge USA, said of this year's surge in Chicago Board of Trade grains market. "Now we are not getting them back. They are beat up."

This exodus has been evident in the sharp decline in the open interest, a measure of traders using the markets, on the exchanges across the board since the summer.
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Open interest is down 33 percent in CBOT grain markets and in CME live cattle and down 35 percent in CME hogs.

Open interest in crude oil is down 22 percent from May, while gold is down 42 percent and copper is down 31 percent in that time, according to Commodity Futures Trading Commission.

"I think the bulk of the open interest decline has been related to the exit of the index funds and hedge funds from the market," said Rich Feltes, senior vice president at MF Global.

COMMODITIES HEYDAY MAY BE OVER

A few months ago, commodities of all types were the darlings of these wealthy investment funds, which poured cash into crude oil, cattle, corn, copper, and others.

"They were like drunken sailors, they could not stand to have the money in their pockets," Gary Lark, a 30-year veteran of the Chicago Mercantile Exchange livestock markets, said of the rush to buy.

That heyday appears to be over.

"I don't think they are going to be coming back for a while," Feltes said of the funds, "I think they have been stung by the betrayal of the trading adage that commodities trade inversely proportional to equities."

This crash in commodities has sent smaller traders moving to the sidelines as well.

"I think everybody is totally shell-shocked," said Lark. "Everybody got run over by the bus going east. They got up only to be run over by the bus going west."

HOG TRADERS STILL CAUGHT

For instance in the CME's hog market, traders are still long the June 2009 hog contract, said Wilson Cipolla, a long-time hog trader with ADM Investor Services.

These traders bought on ideas the high feed grain prices early this year would have producers feeding fewer hogs thus driving up hog prices.

However, corn prices came crashing down a few months later amid forecasts for a bumper U.S. crop. Hog prices came down as well, stranding these traders with money-losing positions.

"There were an awful lot of sharp guys who bought June hogs figuring prices would go higher," said Cipolla. "It is a blood bath, they can't get out."

The June hogs peaked in July at 100.25 cents per lb, but on Monday was at 79.375, a 21 percent decline.

Similar tales can be found in the cattle pit, at the nearby Chicago grain markets, in Winnipeg where canola and barley are traded and in New York, where crude oil, gold, and other commodities trade.

"We have had just a massive meltdown here. Everybody got on the same side of the boat. Everybody was long and wrong," said Keith Ferley, a Winnipeg commodity broker for Union Securities. "I think we are at the point now where participants have moved to the sidelines in disbelief."

In New York, crude oil topped $140 a barrel in July as funds and speculators poured bought on the belief that demand by China and India would reduce supplies. However, souring economies worldwide and an aversion to $4 per gallon gas by U.S. motorists slashed demand, and crude came tumbling down to about $40.

"Given the rate at which we are selling off at, we shudder to think where crude oil prices will be when the boys from OPEC get together in 12 days' time ... an eternity in our view," MF Global analyst Edward Meir said last week when oil dropped 25 percent, its deepest weekly rout in 18 years.

The Organization of the Petroleum Exporting Countries is meeting in Algeria on Dec. 17. (Additional reporting by Barani Krishnan; Editing by Marguerita Choy)