David and James Hamman launched their fundamental Livestock and Grains Program in March of 2010 but it really was decades in the making.
The principals of Demeter Capital Management were brought into the business by their dad, Fred Hamman, who was a hog buyer at the old Chicago Union stockyards in the 1960s. The senior Hamman began using his vast knowledge of livestock fundamentals to speculate for himself and some customers with the relatively new livestock futures at the Chicago Mercantile Exchange. When the stockyards were closing, Hamman decided to continue to trade.
“It all started with our dad who got a job out of college at the Union stockyards,” James says. “He bought hogs for about six or seven years before the stockyards were closing as the packing industry moved away. He started trading and was successful and built a [trading] business.”
James and David would visit him and see the trading floor and became intrigued by trading.
James joined his dad at Heinold Commodities in 1984 after graduating from the University of Illinois. “I always knew I wanted to do something with agriculture,” James says. He would often visit his grandfather’s hog farm in Navoo, Il.
He started at Heinold and then ConAgra bought it out and James and his dad left to go to Refco. By that time David, who also attended U of I, joined the family business. “I went over to Refco and Jim and I partnered and started to split our customers up,” David says.
By 2010 David and James decided to take their generational knowledge of agricultural markets and launch commodity trading advisor Demeter, named after the Greek goddess of agriculture.
The fundamental discretionary program has produced a compound annual return of 16.42% since March 2010 and is up 25% in 2014 year-to-date through August.
“We are all about fundamentals,” says David. “If you count dad’s experience, Jim’s experience and my experience, it is over 100 years of watching and analyzing agricultural futures: Seasonalities, supply and demand, etc. We realize that technical are a fundamental but they don’t’ rule our trading.”
The brothers, who jointly decide on every trade, usually are on the same page, even to the point of completing each other’s thoughts. “We are pretty disciplined, we generally want to buy a break and sell a rally,” says James. “We are not aggressive press traders,” David concurs. “We are conservative, we truly try and manage our money and not do the big highs and lows,” he adds, with James noting, “We are very risk-averse, our margin to equity is 5% to 10%.”
They trade livestock and grains but with a greater focus on livestock. Trades can last from three weeks to a year, though most last no longer than four months.
While directional traders, most positions are put on through spreads and options. “That has evolved as the market has gotten more and more volatile and more global,” James says. “It is a lot riskier so instead of doing so many outrights we do long calls, buying premium and spreads.”
David adds, “We try and hunt value. Let’s just say we can sleep at night. The spreads have gotten a little more volatile. Over the last six months there could be 200-point to 300-point swings in the spreads that were unheard of 10 years ago.”
Demeter has taken advantage of a pretty volatile livestock environment. “We are in unchartered waters with the meat industry because we have a shortage of cattle, and the PED (Porcine Epidemic Diarrhea) thing in hogs so there is a lot of volatility,” James says. “China’s need for meat continues to grow, Russia is cutting off our imports but needs to buy somewhere else; it is very dynamic right now. ”
Demeter had to be patient because it took a while for the market to react to the threat of PED.
“We heard about it back in late 2013 and how bad it was, and we bought hogs all the way out to May (2014) but the market completely ignored the disease. It kept getting worse and then people panicked and started buying meat before it got to summer,” David says. “The market took two months before it realized what was going on. “
James adds, “PED has caused a 5% to 10% reduction in the hogs. [But] they could come up with a vaccine tomorrow and the game could change and they will be able to expand. That is one thing about agricultural markets; there always seems to be something that comes along, weather or some disease.”
The brothers think it may also take some time for this year’s expected record crop to affect meats. “Everyone knows it is a giant crop and will need to go cheaper,” James says. “People think that because (currently) we have cheap grain prices we also are going to have cheap livestock right away, but we think it is going to take a little longer.”
It may take longer for this year’s record crop to move livestock prices but when it does, Demeter will be waiting to exploit it, utilizing decades of market expertise to create profit for its clients.