Bloomberg News

Funds Cut Bets on Rising Food Costs to 27-Month Low: Commodities

December 12, 2011

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Dec. 12 (Bloomberg) -- Hedge funds cut bullish bets on agricultural prices to the lowest level in more than two years on signs of expanding global supplies.

A measure of speculative positions across 11 products from wheat to coffee to cattle fell 3.6 percent to 258,071 futures and options in the week ended Dec. 6, Commodity Futures Trading Commission data show. That’s the lowest since September 2009. Bullish wagers on corn fell 11 percent to a 17-month low, and bearish ones on cocoa increased for a fourth week.

World food prices tracked by the United Nations retreated for a fifth consecutive month in November, the longest decline in more than two years. The U.S. government said Dec. 9 that combined global inventories of corn, soybeans and wheat will be 3.2 percent larger than anticipated a month earlier. Cocoa capped its longest slump in 50 years last week on increasing supplies from Ivory Coast, the world’s biggest producer.

“We’ve got all the harvest data, and there’s not a lot of catalysts that are going to turn around the direction of agricultural prices,” said Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.5 billion of assets.

Cattle, Wheat Slide

Last week, the Standard & Poor’s GSCI Agriculture Index of eight commodities touched a 14-month low on Dec. 9, for a weekly fall of 1.8 percent. Cattle, wheat and soybeans led the retreat. The MSCI All-Country World Index of shares lost 0.4 percent last week, while the Dollar Index, a measure against the currencies of six trading partners, rose less than 0.1 percent. The yield on 10-year Treasuries advanced 3 basis points to 2.06 percent, according to Bloomberg Bond Trader prices.

Cattle prices fell 3.9 percent in Chicago, the most since August. Wheat dropped 4.7 percent, and soybeans declined 2.5 percent. Cocoa tumbled for 12 consecutive sessions through Dec. 9, the longest slide since at least 1961, according to data compiled by Bloomberg. The S&P GSCI Index of 24 commodities, which includes energy products and metals, retreated 1.7 percent.

A measure of 55 food items fell 0.4 percent in November, the UN’s Rome-based Food and Agriculture Organization said Dec. 8. World cereal production will climb 3.5 percent to a record 2.32 billion metric tons this year, the FAO forecast. The food- price gauge has dropped 9.6 percent since reaching a record in February, easing a surge in costs that helped spark uprisings across northern Africa and the Middle East this year, ousting leaders in Tunisia, Egypt and Libya.

Soybean Holdings

Speculators boosted their bearish soybean bets to 10,193 contracts last week, the most negative since October 2006. Investors are also net-short in cocoa, wheat, soybean meal and soybean oil, as well as copper and natural gas.

“Fund managers don’t like to be long the grain markets with rising supplies,” said Dan Cekander, the Chicago-based director of grain research at brokerage Newedge USA LLC. “As long as supplies appear to be adequate, there will be less interest in agricultural commodities.”

World wheat stockpiles will total 208.52 million tons by June, 2.9 percent more than forecast a month earlier and the highest in more than a decade, the U.S. Department of Agriculture said Dec. 9. Soybean reserves will be 1.5 percent bigger than last month’s estimate, and corn supplies will be 4.6 percent higher. The supply outlook for all three crops exceeded analysts’ forecasts.

Wheat futures for March delivery fell 0.3 percent to settle at $5.9425 a bushel on the Chicago Board of Trade. Corn futures for March delivery were little changed at $5.94 a bushel, while January soybeans rose 0.5 percent to $11.12 a bushel.

Cocoa Plunges

Cocoa prices have plunged 42 percent since reaching a 32- year high in March. Prices had surged after a civil war in Ivory Coast erupted following a disputed presidential election in November. Investors raised their net-short position in cocoa by 35 percent to 7,986 contracts, the CFTC data show.

A broader measure showed that funds increased their net- long positions across 18 U.S. commodities by 4 percent to 589,252 contracts. Investors cut bearish bets in copper by the most in five weeks and increased holdings in crude oil on signs that economic growth will be sustained.

U.S. consumer confidence reached a six-month high in December, the Thomson Reuters/University of Michigan preliminary index showed Dec. 9. European leaders agreed to a blueprint for closer fiscal union last week to contain the region’s two-year financial crisis. China, the biggest consumer of everything from energy to copper to soybeans, said Nov. 30 it would lower banks’ reserve requirements for the first time in almost three years to encourage lending and shore up growth.

‘Risk-On Trade’

“There’s more of a risk-on trade,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “Although Europe continues to struggle along and there are still a lot of issues there, on a relative basis they’re better off than they were last week. That puts a boost under the commodities trade.”

Investors put $284 million into commodities funds in the week ended Dec. 7, after a net outflow of $122 million a week earlier, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows.

Funds reduced bets on lower copper prices by 61 percent to a net-short position of 2,704 contracts, the biggest decrease in bearish sentiment since Nov. 1. Those on higher crude-oil prices rose 4.1 percent to 202,735 contracts, the CFTC data show.

Gold Bets

Gold wagers climbed 3.5 percent to 151,347 contracts, snapping two weeks of declines. Bullion traders are more bullish as investors buy the metal at the fastest pace in a year.

Eighteen of 26 surveyed by Bloomberg expect the metal to advance this week, the highest proportion since Nov. 11. Holdings in exchange-traded products backed by gold rose more than 108 tons since the start of October, the most since the second quarter of 2010, data compiled by Bloomberg show. The amount of metal in ETPs reached a record on Dec. 6.

Commodity assets under management rose by almost $40 billion to $365 billion in October, Societe Generale SA said in a report Dec. 5.

“If people are feeling better about a resolution in Europe and better about the outlook for China, that portends a better economic outlook,” said Dan Denbow, a co-fund manager of the $2.1 billion USAA Precious Metals and Minerals Fund in San Antonio. “Commodities are a pro-economic bet.”

--With assistance from Jeff Wilson in Chicago and Chanyaporn Chanjaroen in Singapore. Editors: Millie Munshi, Daniel Enoch

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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