Funds are beginning to wake up to long-neglected European grain and oilseed derivatives, but analysts said on Monday the contracts needed more liquidity to spark a rush of investment capital. Euronext Liffe, created after Euronext's take-over of Liffe in 2002, trades commodities derivatives in London, Amsterdam and Paris. The French market offers futures and options in milling wheat and rapeseed as well as maize (corn) futures.
Investment funds, especially hedge funds, have been very active in US commodities derivatives as well as on London-based Liffe futures, but have steered clear of the French commodity market, still known by its former name the Matif, due to a lack of liquidity.
Traders said things began to change two years ago, when the spotlight fell on the French market after Canada's canola (rapeseed) crop was hit by drought, leaving many traders looking for an alternative market for their cover.
"US traders looked for a way to cover themselves and they remembered that European rapeseed was traded in Paris. There is now more and more arbitrage between Winnipeg's canola futures and the Matif," one broker said.
This prompted a rise in Matif rapeseed volumes and the contracts' higher liquidity and open interest has now made it the most attractive Matif future for investors.
"Funds are mostly attracted to the rapeseed contract because they feel comfortable there. Technical analysis works well on the contract," said Remy Gaussen, technical analyst at chartists Trading Central.
The interest is mostly likely to have come from the type of fund known as CTA Global which are hedge funds that trade commodity futures, options as well as foreign exchange.
The hedge fund industry has been growing at a rapid rate and now manages an estimated $1 trillion in assets, up from around $200 billion 10 years ago.
Euronext said that in addition to rapeseed, wheat futures were also becoming interesting to funds as volumes were increasing - now up 39 percent on the year - and open interest was catching up with rapeseed levels.
"There is now some fund participation in wheat as well as the rapeseed contracts," Eric Hasham, product development manager at Euronext Liffe, told Reuters.
Rapeseed futures reached an all-time record of open interest level on October 19, at 21,241 lots. In August, milling wheat futures had set an open interest record at 18,162 lots.
Euronext said there had been more interest from funds, especially hedge funds, in all Euronext Liffe's commodities products recently, because they were not correlated with other asset classes such as equities.
However analysts and traders stressed that funds' impact on the Matif was still low - around two percent of total volume - and that speculative interest on the Matif contracts was far from levels seen on other futures markets.
"When funds come in, it is for an order of 20 lots, maximum 100. It has nothing to do with the way they work on London's cocoa and sugar contracts or even more so on US markets," a Matif futures trader said.
Brokers said the main reason for hedge funds to stay cautious was that there is not enough liquidity for them to get in and get out of positions quickly.
On average, there are around 800 lots traded daily on Euronext's rapeseed contract, against 30,000 to 40,000 lots on the Chicago board of Trade soybean futures.
"We would need to multiply volumes at least by ten to raise more fund interest," one broker said.
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