Speculators kicked out of agricultural markets, crop selling intensified

It marks a sharp reversal from earlier this year when currency managers concerned about inflation and war-related supply problems helped drive commodity prices up in futures markets, betting on price increases. Wheat and soybeans hit record prices earlier this year and corn climbed near their all-time highs, but since then speculators have profited by exiting agricultural markets, trading off inflation and battling a recession .

Crop prices have fallen to where they were a year ago, at a historically high due to poor harvests, but before Russia’s invasion of Ukraine caused markets to swell.

Speculative support has emerged from the broader market for raw materials ranging from crude oil to copper, pushing down prices, raising hopes among investors that inflation is peaking. But in agricultural commodities, which affect the prices of fuel, food and clothing, the rush of traders inside and out has been particularly evident and influential.

Dave Whitcomb, who runs Peak Trading Research, said, “Hedge funds are always the price drivers in the ag market. We look at what they are doing and what the price is doing. When hedge funds sell, prices go down.” “

This is because futures trading maintains a balance between farmers and those involved in the production, trade and consumption of actual crops, such as food manufacturers. The goal of speculators is to profit on price moves rather than to manage risk. When too many of them start placing similar bets, they can throw the market out of balance and increase the price move.

Rising agricultural prices became a popular bet on Wall Street in the autumn of 2020. The demand for economies emerging from the lockdown was increasing. Food importers were eager to restock. The harvest was bad. Hedge funds and other speculators pile in.

As of early 2021, they had placed their largest collective bet on price increases in 13 agricultural commodity markets, measured in the number of contracts, according to Commodity Futures Trading Commission data compiled by Peak Trading. When Russia invaded Ukraine in late February and gave grain a new impetus, the business’s popularity was fading. As prices rose, the size of speculators’ bets increased to nearly $57 billion in March, the largest in 11 years, according to Peak.

Small investors joined the frenzy, pumping so much money into an exchange-traded fund that holds wheat futures that the fund ran out of shares to sell in early March. Regulators allowed the Teucrium Wheat Fund to sell more shares and its assets rose to $723 million from $86.2 million in May before the invasion of Ukraine. Since then, more money has flown out of it from the fund and its assets have shrunk to $324 million.

In the futures markets, the sell-off began when the Federal Reserve began raising interest rates to blunt inflation by slowing consumption. A strengthening dollar, which makes commodities more expensive for importers, and fears of a recession prompted traders to bet on rising prices. According to Peak Trading, the stake was almost completely dissolved by the end of July.

Benchmark futures prices for maize and wheat have fallen by 25% and 27%, respectively, in the past three months. Soybean futures are down 16% in that time.

Analysts at Goldman Sachs say the sell-off has been “separated from physical fundamentals and driven by financial liquidations.”

Analysts at JPMorgan say the collapse is a “deep dislocation in global agricultural trade flows and in no way mitigates the risk of a physical supply shortage by 2023.” He says prices have fallen below the cost of production and estimates that there is a 20% to 30% upside in grain prices due to supply issues.

Risks include ongoing wars in Europe, bad weather, and short-lived goods around the world.

Although Ukraine shipped its first cargo of grain since Russia’s invasion this week, analysts warned that an agreement allowing the safe passage of food from the Black Sea could be broken. Even if it does, it will take months to clear the silent grain backlog in the country. The US Department of Agriculture has predicted that Ukraine will export about half a ton of grain and seeds this season as compared to last season.

Meanwhile, US crops are threatened by some of the hottest summer weather and drought on record. “Positions for corn, soy and spring wheat have declined steadily over the past six weeks,” Goldman analysts wrote in a report on Wednesday. Consumption at all-time low

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