Hedge funds boosted bullish commodity bets to the highest since 2012 as extreme weather threatened global crops and a polar blast increased U.S. demand for heating fuel.
The net-long position across 18 U.S.-traded commodities rose 18 percent to 1.25 million futures and options in the week ended Feb. 18, the highest since September 2012, U.S. Commodity Futures Trading Commission data show. Investors tripled the net-long position in arabica coffee this month to the most bullish since May 2011. Gold wagers climbed to a 16-week high.
Brazil, the biggest sugar and coffee grower, had the driest January in six decades, scorching crops. Arctic-like cold is projected for the eastern two-thirds of the U.S. at the end of the month, boosting demand for natural gas. From extreme cold in the Midwest to drought in California and South America, weather is the “big driver of commodities,” Barclays Plc said in a Feb. 21 report. Commodity funds are headed for the first monthly inflows since September, EPFR Global data show.
“With coffee and things, these rallies are absolutely weather-driven right now,” said Shonda Warner, the managing partner of Chess Ag Full Harvest Partners in Clarksdale, Mississippi, which manages about $150 million of assets. “If we continue that dry weather, we’re going to have a lot of damaged crops, and we’re going to be in short supply, and that’s going to be positive for the markets.”
The Standard & Poor’s GSCI gauge of 24 raw materials climbed 1.7 percent last week, the third consecutive gain and longest rally in four months. Every commodity except copper and zinc rose, led by coffee, natural gas, hogs and sugar. The MSCI All-Country World index of equities rose 0.5 percent, while the Bloomberg Treasury Bond Index was little changed. The Bloomberg Dollar Spot Index, a gauge against 10 major trading partners, increased 0.3 percent.
A measure of speculative positions across 11 agricultural products climbed 19 percent to 573,187 contracts, the highest since October 2012, CFTC data show. The gauge doubled since the end of January. The S&P GSCI Agricultural Index of eight crops climbed 3 percent last week, the fourth straight weekly increase and the longest rally since September 2012.
Investors are holding a net-long position in coffee of 24,291 contracts, the highest since May 2011, CFTC data show. Arabica-coffee prices on ICE Futures U.S. in New York surged 19 percent last week, the biggest gain since August 2001, and reached a 16-month high of $1.775 a pound on Feb. 20. Before February, speculators were betting on lower prices, holding a net-short position for 18 months. Prices touched a seven-year low of $1.0095 in November on forecasts of ample Brazil supply.
Growing areas in Brazil that account for a third of the world’s coffee production are experiencing their weakest rainy season in decades, just when moisture is needed the most for tree roots to absorb soil nutrients. Yields and quality for arabica beans “will be constrained during this season and the next,” Rabobank International said in a report Feb. 21. While rain in the near term may send prices lower, they will be supported by longer-term concern that output will be limited, the bank said.
Persistent dryness also may damage sugarcane and threaten soybean yields, Rabobank said. Raw sugar on ICE Futures U.S. jumped 6.8 percent last week, the biggest gain for a most-active contract since September 2012, and touched 17.79 cents a pound today, the highest since Nov. 19. Soybean futures are up 7.2 percent this month at $13.75 a bushel on the Chicago Board of Trade.
Brazil, the biggest exporter of both commodities, may see lower sugar production, as dryness is expected to persist into this week, MDA Weather Services in Gaithersburg, Maryland, said in a report on Feb. 20. Investors are the least bearish on sugar since December, trimming net-short positions to 26,489 contracts, compared with 38,576 a week earlier, CFTC data show. Bullish bets on soybeans jumped 11 percent to 195,492 contracts, the highest since September 2012.
Soybean production in Brazil and Argentina is still projected to climb 10 percent, even with the dry weather, Rabobank said in its report. Corn and soybean harvests in the U.S. this year will be the biggest ever, meaning an increase in stockpiles before next year’s harvest, the U.S. Department of Agriculture said in a report on Feb. 21.
Corn yields in the U.S., the world’s top grower and exporter of the grain, may jump 4.1 percent this year as output reaches a record 13.985 billion bushels, leaving Aug. 31, 2015, stockpiles at 2.111 billion bushels, or 43 percent bigger than a year earlier, the USDA said. Soybean output will be 3.55 billion bushels, almost doubling reserves to 285 million bushels next year, the agency said. Corn futures fell the most in three weeks on Feb. 21, and prices are down 46 percent from the all-time high of $8.49 a bushel in August 2012.
“There’s no doubt that the rally in those markets, sugar and coffee, has caught the attention of some of the grain trade and people are wondering if there is an adverse impact on soybean yields,” said Dan Cekander, the director of grain-market analysis for Newedge USA LLC in Chicago. “The grain fundamentals themselves don’t suggest a bull story -- not without a significant Northern Hemisphere problem in 2014.”
The S&P GSCI Enhanced Commodity Index, Goldman Sachs Group Inc.’s preferred measure, will drop 4.3 percent in the next 12 months, the bank said in a Feb. 12 report. Agriculture will decline 9 percent as precious metals retreat 14 percent, the bank’s analysts said.
Net-long wagers on four U.S. natural gas contracts rose 5 percent to the highest since May, CFTC data show. Futures surged 18 percent last week in New York, the second straight increase. U.S. stockpiles tumbled 250 billion cubic feet to 1.443 trillion in the week ended Feb. 14, the least for that period since 2004, government data show. January was the coldest start to a year since 2011, the National Oceanic and Atmospheric Administration said in a report Feb. 13.
Gold bets climbed 31 percent to 90,942 contracts, the highest since Oct. 29 and triple the level of bullish bets eight weeks earlier, the CFTC data show. Signs that growth in the U.S. economy, the world’s largest, is weaker than some economists had forecast spurred demand for the precious metal as a haven asset. American sales of previously owned homes fell last month to the lowest in more than a year, the National Association of Realtors said Feb. 21. Federal Reserve Chairman Janet Yellen said on Feb. 11 that the recovery in the labor market is “far from complete.”
Gold prices rose 0.4 percent last week, the third straight increase, and reached $1,339.20 an ounce today, the highest since Oct. 31. Prices gained 11 percent this year after losing 28 percent in 2013, the biggest annual decline since 1981. Assets in SPDR Gold Trust, the biggest exchange-traded product backed by the metal, are heading for the first monthly inflow since December 2012, according to David Mazza, the head of ETF Research at State Street Bank & Trust Co., the marketing agent for the fund.
While speculators remained bearish on copper, they reduced their net-short positions to 8,888 contracts, compared with 15,792 the previous week, the CFTC data show.
Investors added $1.03 billion to commodity funds in February, heading for the first monthly inflows since September, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Money managers have pulled $2.69 billion from funds this year, after record outflows of $43.3 billion in 2013, the most in data going back through 2000, EPFR data show.
“With the decline in prices that we saw last year, you’ve re-established that equilibrium between supply and demand, so the prospects for better growth should pull industrial commodities higher,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which oversees $63 billion in assets. “I don’t think we’re back in the middle of a commodities super cycle at the moment, but returns this year should be relatively rewarding.”