KANSAS CITY — A significant rally in several grain and oilseed futures prices in December left some market participants bewildered, but others saw the surge as a result of the return of hedge fund money to the commodity markets.
Much debate has raged about the influence of commodity funds, or hedge funds, on futures prices, and on markets in general, over the last five years. The debate has engulfed not only grains and oilseeds, but soft commodities such as coffee and cocoa, industrial commodities, including crude oil and metals, and financial futures such as equity indexes and currency futures.
While there is general agreement that "fund" money has played a role in the run-up of several commodity futures prices to record highs in the past year, as well as in the dramatic decline of most prices in recent months, there is little agreement as to their degree of influence. Analysts also agree that other influences, such as supply and demand, weather and general economic conditions, are at play at the same time, making it difficult in most cases to attribute the cause of price changes to any single feature.
But analysts may find little else than hedge fund money to attribute remarkable gains in agricultural commodity futures during the month of December.
Corn, soybean and wheat futures in Chicago as well as wheat futures in Kansas City and Minneapolis all set lows for the month on Dec. 5. March corn futures (the nearby month) then led the way higher, surging $1.18¾ a bu, or 40%, to close at a high for the month of $4.12½ a bu on Dec. 26. Nearby soybean futures rose $1.68¼ a bu, or 21%, during the same period, closing at a high of $9.51¾. Wheat futures on all three exchanges set highs on Dec. 30. Chicago soft red winter wheat rose $1.47 a bu, or 32%, closing at $6.04¾; Kansas City hard red winter wheat rose $1.32 a bu, or 27%, closing at $6.21¾ a bu; Minneapolis hard red spring wheat gained 94½c a bu, or 17%, ending at $6.55½ a bu.
Nearby New York cocoa futures began at a monthly low Dec. 1 of $2,210 a tonne and rose $462, or 21%, to a high of $2,672 a tonne on Dec. 18. Traders noted that cocoa futures positions held by speculators doubled in December.
A somewhat bullish scenario may be made for soybeans because of slow farmer sales, strong export sales, concern about dry weather in South American growing areas and expected smaller planted area in the United States in 2009. But nothing significant changed during December and soybeans saw the second smallest percentage gain in prices.
Corn, on the other had, saw the largest percentage price gain during the month amid a generally bearish scenario of increasing carryover stocks, easing demand from ethanol producers, sluggish export sales and potentially increased U.S. production in 2009.
Supply and demand fundamentals for wheat also were generally bearish, largely due to puny export sales because U.S. wheat prices are not competitive on the world market and foreign sellers, especially Russia, have been winning export tender after export tender.
But analysts surmised funds, with large amounts of investment money, were interested in agricultural commodities despite less-than-stellar supply and demand prospects. The depressed global economy left them few options other than basic agricultural commodity futures, which tend to fare better than other investment vehicles during a recession.
Unlike in prior years when the economy was growing and funds could choose between several classes of investments, the outlook was more risky, if not worse, for such options as crude oil and equities. Even government securities were yielding next to nothing. For example, nearby New York crude oil futures began the month at $49.28 a barrel and sank $15.41, or 31%, to nearly a five-year low of $33.87 on Dec. 19, although prices bounced to $44.60 a barrel on Dec. 31 due new Mideast tensions.
While analysts don’t expect a massive run to agricultural futures, they do expect funds will remain a key factor affecting futures prices in coming months.
This article can also be found in the digital edition of Food Business News, January 6, 2009, starting on Page 20. Click