Speculative hedge fund money is flowing back into commodities and propping up crop prices.
Combined hedge and index fund ownership of corn, soybean and wheat futures had been on a steady decline since 2012 when it peaked at US$68 billion.
This winter it bottomed out at zero. But shortly after the calendar flipped to 2016 fund money came rushing back into agriculture and is now just shy of US$20 billion.
Arlan Suderman, chief commodities economist for INTL FCStone, said there is a lot of investor money out there looking for a home.
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There is a lack of confidence in the stock market. Investors wonder if economic growth is strong enough to justify a sustained rally in equities. They are also leery about the U.S. bond market due to expectations of higher interest rates.
“There is a sense that the commodities have priced in all the bearish news and so therefore it’s time for a change in direction,” he said.
Brian Grete, editor of ProFarmer newsletter, a U.S. news and advisory service, said futures markets have been heating up since March with a strong round of short covering.
“Funds were heavily short at that point in time and since that point they have moved to a pretty aggressive long position, so we’ve seen a complete flip flop,” he said.
“(Investors) were so heavily weighted to the short side of so many markets that the boat was either going to flip over and capsize or they were going to have to correct it somewhat.”
The dramatic switch has had a profound impact on prices. The May soybean contract that set a low of US$8.56 per bushel on March 2 rallied to a high of $10.34 ¾ on April 21. The May corn contract was slower to respond. It went from a low of $3.47 ¼ per bushel on April 1, to a high of $4.02 on April 21.
Not many analysts were forecasting this quick of a return to $10 soybeans and $4 corn. Those two crops tend to lead the way for other grain and oilseed prices, including canola.
Suderman said investors have been lured into crop futures by forecasts of a looming transition from an El Nino to a La Nina.
That could lead to production problems in the United States, especially if the weather turns hot and dry in July.
“That’s where they want to have some money, just in case we have an adverse growing season in the U.S. Midwest this summer,” he said.
Extreme weather events in North and South America have enhanced the investor focus on the possible transition to a La Nina.
They have witnessed excessive rains in the U.S. delta, drought in the southwest plains undone by a huge rain event, flooding in Argentina and drought in Brazil.
Some states in Brazil didn’t see rain for a month. The country’s safrinha or second corn crop will suffer losses. Consultancy Ag Rural is forecasting 54.3 million tonnes of production, down about one million tonnes from earlier estimates.
Brazil has suspended import tariffs on corn from outside the Mercosur trade bloc for six months in order to bolster domestic supplies. There are even reports that it bought its first shipment of corn from the U.S. in two decades.
Meanwhile, Argentina is dealing with excessive rains during its soybean harvest. Some regions got six times the normal April rainfall.
The Buenos Aires Grains Ex-change has shaved four million tonnes off of its 2015-16 soybean estimate and is now at 56 million.
Funds were investing in corn and soybean futures prior to South America’s production problems.
“That just enhanced it and kind of sped things up and gave it an extra kick,” said Suderman.
Grete attributes the sudden interest in commodities to improving global macro-economic conditions, such as the better-than-anticipated first quarter results out of China.
He also noted that Chinese investors do not have much faith in Chinese stocks, so they are putting money into commodities and that is supporting global commodity prices.
Suderman believes the investor money will stick around.
“I think it’s probably here until we see what kind of growing season we have in the Midwest,” he said.
That means markets will be volatile as investor money flows in and out of futures markets.
