Investment funds keep grain afloat

Recent interest at hedge and index funds in the corn, soybean and wheat futures markets is having an impact on prices

Farmers can thank investment funds for the recent surge in grains and oilseeds prices, says an analyst.

As of last week, hedge and index funds had a net ownership position of more than US$30 billion in United States corn, soybean and wheat futures markets.

That is the highest ownership position since early summer of 2018, said Arlan Suderman, chief commodities economist with StoneX.

It is a “big part” of the reason crop prices have drifted higher in recent weeks, he said.

Hedge funds are the real driver of the day-to-day and week-to-week movement in futures prices.

“They’re going to chase whatever is hot or cold. Whatever has a trend in it, they’re going to throw money at that,” he said.

Hedge fund involvement in the crop market has been minimal in recent years. They have preferred to put their money in equities.

But their confidence in equities is waning because the U.S. dollar has been losing strength and the supply of money in the U.S is on the rise.

There is $5.6 trillion of M1 money in the U.S today, which is physical currency and other easily converted monetary items. That is 40 percent more than the M1 supply in October, 2019.

“That, combined with the weak dollar, is raising inflation talk. That changes how the funds view these commodity fundamentals,” said Suderman.

Hedge funds suddenly have a $10 billion ownership stake of corn, soybeans and wheat.

“It’s really the first time that the hedge funds have been net long in the grain and oilseed complex in the last two years,” he said during a recent webinar.

“That right there is a switch in philosophy for the hedge funds.”

Index fund ownership is the highest level it has been in more than six years. Index funds tend to be slower in and out of the market than hedge funds. They tend to provide a long-term lift to commodity markets when they are in.

Fund investment in agricultural commodities had been at historically low levels until recently when interest really started to pick up.

“They’re chasing those assets that have a potentially developing story and I think that well defines the food-based commodities,” said Suderman in an interview following his webinar.

That story is largely composed of suddenly surging U.S. corn and soybean exports to China as it attempts to fulfill its commitments in the Phase 1 trade agreement with the U.S.

That is leading to falling stocks of those commodities. There is also concerns about the impact of a La Nina weather event on South American production.

The funds have focused most of their attention on soybeans. Suderman thinks there is room for more fund involvement in corn and especially wheat.

World wheat stocks are at near record levels but half of those supplies are in China, which doesn’t affect global trade. Meanwhile, stocks in exporting nations are at historic lows.

“We don’t have a lot of room for error,” he said.

It has been dry in the Black Sea region. Russia’s winter wheat belt had the second driest September of the past 40 years and there is no relief on the horizon. It has also been dry in parts of Ukraine.

“If you drop 15 to 20 million tonnes off of next year’s Black Sea crop, all of the sudden you’ve got something really tight,” said Suderman.

MarketsFarm analyst Bruce Burnett said up until now the funds have been largely neutral on Kansas and Chicago wheat and short on Minneapolis wheat.

He agrees with Suderman that wheat could be the next landing spot for fund money but it would likely be hard red wheat and soft red wheat where supplies are tight.

“From an analytical perspective, they would probably view those two wheats as being better bets on the bullish side,” said Burnett.

Suderman thinks it will take a lot more to lure fund money to corn. There needs to be a big decline in U.S. production, surging Chinese demand or significant weather problems in South America.

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