CHICAGO: Fed up with poor returns and stomach-churning volatility, commodity index funds have been pulling money out of the crop arena so far in 2013, having cut long wheat positions by 17.4 percent and soybean positions by 19 percent since the beginning of the year.
Index funds still seem to favor corn for now, with fund long positions up about 5 percent in that market over the first eight weeks of the year. But if the trend in wheat and soybeans sets the overall tone for the crop markets, a net outflow in index money could well emerge in corn as well ñ and lead to a general deflationary price environment regardless of fundamental developments.
Although investments in the commodities arena have been growing in popularity since the middle of the last decade, 2010 appeared to have been a banner year in terms of allure after many of the major commodity indexes posted strong returns relative to the equities and fixed income arenas.
The agricultural market indexes did particularly well in 2010, with the S&P Goldman Sachs Agricultural Spot Index gaining roughly 40 percent for the year compared to the approximately 10 percent gain in the S&P 500 equities index over the same period. The broad-based Thomson Reuters/Jeffries CRB Commodity Index returned around 17 percent in 2010, following a more than 23 percent gain the year before.
This era of compelling commodity market returns in 2008-2010 — coming against a backdrop of equity market turmoil ñ cemented the commodity arena’s status as a bona fide investment destination, and investors of all ilks streamed into various commodity-tied investment vehicles in the months and years that followed.
The problem for those investors who joined the party after 2010 is that overall returns in 2011 and 2012 were extremely poor compared to those of the preceding years, with the SPGSAG index posting a 14 percent loss in 2011 followed by a 3.9 percent gain last year. The broader TRJCRB dropped 8.2 percent in 2011 and about 3.3 percent in 2012.
In contrast, of course, the S&P equities index held pretty flat in 2011, posted a more than 13 percent gain in 2012, and is off to a roaring start in 2013 after a chorus of investment managers called for increased allocations into the stock market.
Much of the money filtering into the stock market is coming from the sidelines, where it had been parked in cash or low yielding ultra-safe bonds.
But a decent chunk is also likely coming out of beleaguered commodities funds, where the poor returns and outsized volatility seen in recent years turned a number of investment advisers off.
It is clear from CFTC Commitment of Traders data that commodity index funds have been actively shedding exposure to an array of agricultural markets so far in 2013. Aside from the near 20 percent cuts in long exposure to CBOT wheat and soybeans, index funds have also cut long exposure to soybean oil, hogs, cattle, and cotton, among other commodities. Some markets such as Kansas City wheat, sugar and coffee have seen net inflows from the index crowd, so the money flow has not been entirely one-way.
But it is clear from the larger scale of outflows versus inflows than the index investor mindset is broadly anti-commodities at this juncture.
So far this souring in index investor sentiment has been largely overlooked by the rest of the market in the corn, wheat and soybean arenas.
Indeed, commercial and large speculative traders — who are more active than the index-linked investors ñ have actually grown their long positions in the top crop markets so far in 2013.
But such inflows are not uncommon over the opening weeks of every year as new calendar-year allocations to entities such as hedge funds are deployed.
Once those new allocations are fully vested, however, there is a risk of that money flow slowing down, which could help expose the “outbound” bias of the index fund more clearly.
Commercial users of the agricultural products may be pleased to see less buy-side competition for these commodities.
But for bullish speculators, the scaling back of index positions will prove to be a cause for alarm, as a steadily retreating tide of index-based funds will likely have a deflationary effect on prices unless it is offset by more aggressive buying interest from other trader groups.
— Gavin Maguire is a Reuters market analyst. The views expressed are his own.
