Speculators reduced wagers on a rally in agricultural prices to a five-month low just as returns from crops and livestock beat most other commodities on concern that parched fields from Iowa to Russia will curb supply.
Hedge funds and other money managers cut net-long positions across 11 U.S. farm goods by 20 percent to 312,099 futures and options in the week ended June 5, the lowest since Dec. 27, Commodity Futures Trading Commission data show. Corn holdings tumbled to the lowest since June 2010 and traders switched to betting on a decline in wheat prices. Agricultural commodities accounted for nine of the 10 best performers in the Standard & Poor’s GSCI Spot Index of 24 raw materials last week.
Speculators cut combined bullish bets across the S&P GSCI by 13 percent to the lowest this year on mounting concern that Europe’s widening debt crisis will derail global growth and curb demand for commodities. Agricultural prices rallied as dry weather harmed the corn crop in Iowa and Illinois, the biggest U.S. growers, and Russia’s government declared a state of emergency in some areas because of drought.
“People don’t look at fundamentals when the crisis overshadows everything,” said Stanley Crouch, who helps oversee $2 billion of assets as chief investment officer at New York-based Aegis Capital Corp. “The tug of war gets tough when the correlation between the economy and agricultural commodities is very high.”
The S&P GSCI Agriculture Spot Index jumped 4.1 percent last week, the first advance since mid-May, as the wider gauge of 24 commodities climbed 1.2 percent. The MSCI All-Country World Index of equities rose 2.9 percent, and the dollar retreated 0.5 percent against a basket of six trading partners. Treasuries lost 0.9 percent, a Bank of America Corp. index shows. The broader S&P GSCI fell 1 percent to settle at 582.43 in New York today.
The U.S. Department of Agriculture probably will cut its estimates for this year’s domestic corn, soybean and wheat inventories, Morgan Stanley analysts led by New York-based Hussein Allidina said in a report June 8. The USDA will update its global crop outlook tomorrow.
Crops are wilting at a time when China’s appetite for meat from grain-fed livestock is boosting global demand and sales from the U.S., the biggest exporter of corn and soybeans. Increasing demand helped U.S. farm income reach a record $98.1 billion in 2011. It will be $91.7 billion this year, the second-highest ever, the government estimates.
The rally in agriculture may reverse should growing conditions improve. Corn traded in Chicago, a global benchmark, fell as much as 18 percent in the three months to June 1 on prospects for U.S. farmers planting the most acres since 1937. Wheat supply is also improving after growers gathered 20 percent of the winter crop by June 3, compared with a five-year average of 3 percent, government data show.
Funds cut corn bets by 33 percent to 41,337 contracts, the lowest since June 29, 2010, the CFTC data show. Traders are holding a net-short position in wheat of 2,549 contracts, switching from a net-long holding of 15,585 contracts a week earlier. Soybean wagers fell for a fifth consecutive week.
Global food prices had their biggest drop in more than two years in May as the cost of dairy products slumped. An index of 55 food items tracked by the United Nations’ Food & Agriculture Organization fell 4.2 percent, the agency said June 7. The gauge dropped 14 percent from a record in February 2011, when higher costs coupled with rising unemployment helped spark protests across the Middle East and North Africa.
“Commodities are facing headwinds in the form of a global slowdown,” said Greyson Colvin, the managing partner at New York-based Colvin & Co., which manages $18 million of assets. “It’s hard to be long at this point. We are on the sidelines waiting for things to play out. The expectations for the 2012 crop are huge.”
Money managers trimmed holdings across the S&P GSCI to 538,156 contracts by June 5, the lowest since Dec. 27, the CFTC data show. The gauge rallied 1.3 percent the following day, the most in two months.
Investors added $17 million to commodity funds in the week ended June 6, driven by an inflow of $647 million into gold and precious metals, according to Cambridge, Massachusetts-based EPFR Global, which tracks money flows.
Fund managers lowered bets on a rally in raw sugar for a second week. Prices surged 4.7 percent to 19.98 cents a pound last week in New York, the biggest gain since mid-March. Heavy rainfall has hampered production and shipments from Brazil, the biggest grower and exporter.
Speculators increased net-short cocoa holdings to 11,015 contracts, the most bearish since April 24. Futures for September delivery surged 5.7 percent last week, the most since February. Nigeria, the fourth-largest producer, faces an infestation of canker worms that threaten about half of the nation’s trees, the Cocoa Association of Nigeria said June 5.
“Investors weren’t willing to go long because of the global fears and were not looking at individual commodities,” said Walter ‘Bucky’ Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “The story here is more fundamental. A weather problem can affect wheat prices, but people were more glued to the global financial space.”