Bearish Agriculture Options Bets Surge to Two-Year High
March 4 (Bloomberg) -- David Donnan, a partner at A.T. Kearney, talks about rising food prices and the impact on food manufacturers and consumers. Donnan speaks with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)
Investors are making the most bearish bets against crops and livestock in the U.S. equity- options market since 2008 after the World Bank said prices surged to dangerous levels.
The number of outstanding puts to sell the PowerShares DB Agriculture Fund, which tracks 11 commodities from corn to soybeans and cattle, versus calls to buy has increased to 0.67 and reached a 28-month high of 0.69 on Feb. 28. The ratio doubled in January and February, the fastest two-month rate since February 2008, according to data compiled by Bloomberg.
The $4 billion exchange-traded fund had its first outflows of the year in the week ended Feb. 23, with investors removing a net $116.4 million, EPFR Global data show. While corn, cocoa, coffee and cotton closed yesterday at their highest levels of the year, sugar, wheat, hogs, soybeans and cattle have fallen a median 5.5 percent from their peaks.
“People want to buy protection,” said Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore. “We’ve been seeing a tremendous amount of money coming out of grains and a lot of the agriculture stocks, going toward energy based on what was happening in the Middle East.”
Record Food Prices
Global food prices rose to a record in February and grain costs may continue to rise in the next several months, with only rice keeping the world from a repeat of the crisis three years ago, the United Nations said yesterday. An index of 55 food commodities rose 2.2 percent to 236 points from 230.9 in January, the eighth consecutive gain, according to the UN’s Food and Agriculture Organization. In February, the World Bank said the rise has pushed 44 million more people into extreme poverty since June.
Increasing incomes in developing countries have boosted demand for meat and dairy products, requiring more grain for livestock feed and land for grazing animals, according to an article published yesterday in the agency’s Finance & Development magazine. Rising demand for biofuels and bad weather also have tightened food supplies, the International Monetary Fund said.
The ETF slipped 0.4 percent to $35.30 as of 4 p.m. in New York today, trimming its rally since the 15-month low reached on June 7 to 54 percent. Corn, soybeans, sugar and live cattle together account for half of the fund’s value, according to the PowerShares website. Other holdings include cocoa, coffee, hogs, wheat and cotton.
Sugar, Wheat
Sugar futures dropped 13 percent from their high on Feb. 2 through yesterday. Wheat, hogs, soybeans and cattle retreated 8.9 percent, 5.5 percent, 2.7 percent and 0.8 percent, respectively, from their 2011 peaks.
“We’ve been seeing some liquidation in all the commodities,” said Troy Vetterkind, the owner of Vetterkind Cattle Brokerage, which trades grain and livestock derivatives in Chicago. “Corn, beans, cattle and everything is on a huge rally, so I can see why there’d be more put buying.”
Four of the ten PowerShares DB Agriculture Fund (DBA) contracts with the biggest open-interest increases in the past two weeks were puts, according to data compiled by Bloomberg. The July $32 puts jumped the most, adding 9,167 through yesterday to 12,704 options. The contract with the highest open interest was the January $30 put with 24,307 options as of yesterday.
Central banks in emerging economies from China to Russia are raising interest rates and boosting bank reserve requirements to battle inflation, while anti-government protests in the Middle East and northern Africa drive up fuel costs. The Standard & Poor’s 500 Index, the benchmark measure of U.S. shares, dropped as much as 2.8 percent in February amid concern higher oil prices will slow consumer spending, which makes up about 70 percent of the world’s biggest economy.
“People are looking at the options to protect their positions,” said Mike Zarembski, a senior commodity analyst at OptionsXpress Holdings Inc. in Chicago. “This is cheap insurance if we see an economic slowdown.”
PowerShares DB Agriculture Fund weightings as of Dec. 31,
according to fund fact sheet:
12.50% Corn
12.50% Soybeans
12.50% Sugar
12.50% Live Cattle
11.11% Cocoa
11.11% Coffee
8.33% Lean Hogs
6.25% Wheat
6.25% Kansas Wheat
4.17% Feeder Cattle
2.78% Cotton
To contact the reporters on this story: Cecile Vannucci in New York at cvannucci1@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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