Speculators leave the agricultural markets and intensify the sale of crops

The exodus of hedge funds and other speculators from commodity markets has exacerbated lower prices for wheat, corn, soybeans and other commodities, which some analysts say are now cheaper than supply and demand rationales.

It’s a sharp reversal of what happened earlier this year when money managers, worried about inflation and war-related supply problems, helped drive up commodity prices by hoarding them in futures markets with bets on price hikes. Shredded wheat and soybeans Record prices earlier this year Corn prices have risen near all-time highs, but since then speculators have exited agricultural markets, cashed in profits, closed inflation trades, and braced for a recession.

Crop prices have fallen back to what they were a year ago, which they have historically been High due to poor harvests But before the markets were ignited by the Russian invasion of Ukraine.

Speculative support has moved out of the broader market for raw materials from crude oil to copper, which has contributed to the lower prices that have occurred It raised hopes among investors that inflation has peaked. But in agricultural commodities, which affect the prices of fuel, food, and clothing, the rush of merchants in and out has been particularly evident and impressive.

“Hedge funds are always the driver of price in ag markets,” said Dave Whitcomb, who runs Peak Trading Research. “We see the highest correlation with what they do and the price they do. When hedge funds sell, prices go down.”

The reason is that futures trading between those involved in the production, trade and consumption of actual crops, such as farmers and food makers, tends to strike a balance. Speculators aim to profit from price movements rather than managing risk. When many of them start making the same bets, they can throw the market out of balance and amplify price movements.

Higher agricultural prices became a common bet on Wall Street in the fall of 2020. Demand from economies emerging from lockdown was rising. Food importers were eager to restock. The crops were poor. Hedge funds and other speculators piled up.

Small investors poured so much money into an exchange-traded fund that holds wheat futures contracts, that the fund ran out of shares for sale in early March.


Erin Yun/Bloomberg News

By the start of 2021, they had amassed the largest ever collective bet on price increases in 13 agricultural commodity markets, as measured by the number of contracts, according to CFTC data compiled by Peak Trading. The popularity of trade was fading when Russia invaded Ukraine in late February and The grain gave a new impetus. With prices soaring, the bet size of speculators grew to nearly $57 billion in March, the largest in more than 11 years, according to Peak.

Small investors joined in the frenzy, pouring so much money into an exchange-traded fund that holds wheat futures, that the fund ran out of shares for sale in early March. Organizers Grants

Teucrium wheat box

Authorization to sell more shares and its assets swelled to $723 million in May from $86.2 million before the invasion of Ukraine. Since then, more money has flowed out of the fund than it did in it, and its assets have fallen to $324 million.

In the futures markets, selling started after the Federal Reserve began raising interest rates to curb inflation by slowing consumption. The strengthening the dollar, which makes goods more expensive for importers, and fears of a recession prompted traders to offload bets on higher prices. By late July, the bet was almost completely cleared, according to Peak Trading.

Benchmark corn and wheat futures prices are down 25% and 27%, respectively, over the past three months. Soybean futures are down 16% in that time.

Goldman Sachs analysts say the selloff is “decoupled from physical fundamentals and driven by financial liquidation”.

JPMorgan analysts say the collapse “hides deep disruptions in global agricultural trade flows and in no way mitigates the risks of physical supply shortages until 2023”. They say prices have fallen below production costs and estimate that there has been a 20% to 30% rise in grain prices due to supply issues.

Share your thoughts

What is your approach now in the commodity market? Join the conversation below.

Risks include ongoing war in Europe, increasingly filthy weather and still-low stocks around the world.

Although Ukraine shipped this week The first shipment of grain since the invasion of Russia, Analysts warn that the agreement allowing the safe passage of food from the Black Sea could collapse. Even if it persists, it will take months to clear the backlog of grain in the country. The US Department of Agriculture expects Ukraine to export about half its tonnage of grain and seed this season as it has in the past.

Meanwhile, some of the hottest summer weather on record and drought threaten American crops. “Corn, soybean, and spring wheat conditions have declined almost continuously over the past six weeks,” Goldman analysts wrote in a report Wednesday, estimating that a 2% to 3% decline in US crop yields could push corn and soybean stocks relative to consumption lower. levels at all.

While the war in Ukraine has upended global supplies of grain, a Wall Street Journal investigation reveals how Russia has quietly institutionalized the theft of hundreds of thousands of metric tons of it from newly occupied regions of Ukraine and to Russia-allied nations in the Middle East. . . Image caption: Adele Morgan

Write to Ryan Dezember at ryan.dezember@wsj.com

Copyright © 2022 Dow Jones & Company, Inc. all rights are save. 87990cbe856818d5eddac44c7b1cdeb8

Leave a Comment