Funds Revive Agriculture Bets as Drought, Floods Hurt Crops, Demand Grows

Funds boosted bets on rising agricultural prices for the first time in four weeks, led by rebounds in holdings of wheat and soybeans, as extreme weather threatened to limit output as global demand increases.

Speculators raised their net-long positions in 11 U.S. farm goods by 8.9 percent to 723,658 futures and options contracts in the week ended May 24, government data compiled by Bloomberg show. The increase was the first since April 26. A broader measure of commodity holdings also advanced last week, with gold up 7.1 percent and crude oil gaining 1.9 percent.

The Standard & Poor’s GSCI Agriculture Index climbed for the second straight week as droughts lingered in China and Europe while excess moisture delayed planting in the U.S. and Canada. Last week, Goldman Sachs Group Inc. and Morgan Stanley signaled a bullish outlook for commodities, raising their forecasts for crude-oil prices by more than 20 percent.

“After the unwinding in the past few weeks, we are seeing interest come back in commodities that have strong fundamentals,” said Walter “Bucky” Hellwig, who helps oversee $17 billion at BB&T Wealth Management in Birmingham, Alabama. “The planting of grains in U.S. has been affected because of weather conditions. As long as the global growth story is intact and the fundamentals remain strong, we will see interest in commodities.”

Corn, Silver

Corn and silver futures have more than doubled in the past year, while wheat, cotton, sugar and gasoline are up more than 50 percent on rising demand from China to Brazil. Global food prices have risen in nine of the past 10 months, touching a record in February, according to the United Nations.

The global recovery from a recession that followed the 2008 financial crisis “is gaining strength and is becoming more self-sustained,” the Group of Eight leaders said May 27 after a summit in Deauville, France.

China, the world’s biggest user of commodities from cotton to zinc, will expand 9.9 percent this quarter, outpacing this year’s first two quarters, a Bloomberg survey of economists showed. In the U.S., the Thomson Reuters/University of Michigan final index of consumer sentiment rose to a three-month high of 74.3 in May from 69.8 in April.

The net-long position of funds across 18 U.S. commodity futures and options jumped 7.6 percent to 1.17 million contracts in the week ended May 24, after holdings plunged 27 percent in previous three weeks, data compiled by Bloomberg from the U.S. Commodity Futures Trading Commission show.

‘Little Pause’

Investors poured $702.8 million into commodity funds in the week ended May 25, the first increase in three weeks, according to EPFR Global, a Cambridge, Massachusetts-based researcher. The previous three weeks had outflows totaling $5.5 billion.

“There was a little pause in the steady drumbeat of uninspiring macroeconomic data,” Brad Durham, an EPFR managing director, said May 27 in a telephone interview.

Wheat prices surged 75 percent in the past year on the Chicago Board of Trade as droughts and floods limited global output. The International Grains Council on May 26 cut its estimate for world production to 667.3 million metric tons from an April forecast of 672.2 million. About 54 percent of U.S. spring wheat was planted as of May 22, below the five-year average of 89 percent, the government estimates.

Hedge funds increased bullish wagers on wheat futures and options traded in Chicago by 155 percent in the week ended May 24, the most since the week ended Dec. 7, government data show. Wheat futures for July delivery closed May 27 at $8.1975 a bushel in Chicago, up 1.6 percent for the week.

‘Back On’ Commodities

“The game is back on” in commodities, said Ron Lawson, a managing director at Logic Advisors, a commodity consultant in Sonoma, California. “You have a weather situation that’s bad in a lot of ways. The agriculture component of the market is pretty loaded for any kind of up move.”

U.S. farmers are running out of time to plant this year’s corn crop after wet weather swamped fields from North Dakota to Ohio and may switch acres to soybeans, which can be sown until late June. Parts of the Midwest, including Illinois and Missouri, received more than double the normal amount of rainfall in the past 30 days, according to the National Weather Service.

Some relief from the tight supply may come from Russia’s decision to let its grain-export ban expire on July 1. The ban imposed in August because of a drought-hit harvest helped drive up global food costs. In India, the second-biggest wheat grower, the monsoon landed in the southern states two days early, increasing optimism that the rains will boost crops.

Oil Holdings Gain

Speculators increased holdings in oil futures and options by 4,112 contracts to 225,677 contracts, halting a three-week slide of 79,553, or 26 percent, CFTC data show. Net-long positions in gold increased by 13,130 contracts to 198,515, after four straight weeks of declines that totaled 43,192 contracts, or 19 percent.

Not all commodity holdings increased. Net-long positions dropped in cocoa, hogs, gasoline and copper, while speculators remained bearish with a net-short position in natural gas.

Managed-money funds held net-long positions in silver totaling 15,226 contracts, down for a fifth straight week and the lowest since February 2010. While silver prices are down 24 percent from a 31-year high of $49.845 an ounce on April 25, the metal has still doubled from a year ago, more than the 27 percent gain for gold.

‘Catching Up’

“As a long-term investment, gold still has some catching up to do with silver,” said Matt Zeman, a strategist at Kingsview Financial in Chicago. “Silver still looks iffy. Gold is a safer bet, and you’re less likely to get shook out of the market in huge swings like we’ve seen in silver.”

Gold futures closed at $1,537.30 an ounce on May 27 in New York, near a record of $1,577.40 reached on May 2.

“The big players like Goldman Sachs are luring people back into commodities,” Zeman said. “A weaker dollar, euro-zone debt issues, and a slowing U.S. economy are going to keep a floor under gold and silver.”

Twenty-three of the 24 commodities tracked by the S&P GSCI index are higher than a year earlier. The weaker dollar is also boosting demand for commodities. The Dollar Index, which tracks the U.S. currency against those of six trading partners, has dropped 13 percent in the past 12 months.

“The general trend is higher for precious metals, industrial metals and agriculture,” said Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which manages $14.8 billion. “When you have an improving standard of living in so many parts of the world, demand will continue to move higher.”

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net;

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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