Funds are flowing back into agricultural commodities for the first time since 2012 as investors look to capitalize on cheap prices, bullish demand and the threat of crop damage from an El Nino weather pattern.
Figures from ETF Securities, one of the largest issuers of exchange traded products, show a small net inflow so far this year after an outflow of nearly 20 percent in 2014.
Across the sector, indices and ETFs saw a net inflow of $400 million in April and a further $400 million in May, according to data from Barclays. This compares to a net outflow of $2.4 billion in the last quarter of 2014.
“If you do look longer-term into demand trends, you’re likely to see pretty solid growth year-on-year,” said Martin Arnold, director of commodity strategy at ETF Securities. “Especially now that we are beginning to see the volatility in weather conditions starting to impact the market’s ability to supply the rise in demand.”
AGCO Corp., the world’s third-largest agricultural-equipment maker, raised its full-year profit forecast because of cost savings and a lower tax rate.
Sales of $2.07 billion in the period matched the average forecast.
AGCO said profit margins this year are expected to be below 2014 because of lower sales and production volumes. A decline in crop prices means
farmers are spending less on equipment this year.
Liquidating hedge funds
Black River Asset Management, the $7.4 billion investment firm owned by Cargill Inc., said it’s liquidating four hedge funds with more than $1 billion in combined assets.
The firm is closing funds that invest in equities, emerging markets, commodities, as well as a fund that focuses on Europe, Middle East and Africa, James Gruver, a spokesman for Black River, said Thursday.
The hedge funds account for about 15 percent of Black River’s assets, he said. The closures at Black River, which was started in 2003 and is run by Gary Jarrett, adds to a roster of hedge funds that have liquidated, some after struggling to navigate markets.
Armajaro Asset Management plans to close its $450 million commodities fund after losing money, a person with knowledge of the matter said this week. Fortress Investment Group LLC is shrinking its macro business to help turn around performance that’s struggled since the start of 2014.
Black River was formed from Cargill’s capital markets group and was named after a river in Wisconsin where Cargill invested in a logging company in the late 1880s. Black River’s largest hedge fund, the $1.8 billion Fixed Income Relative Value Opportunity Fund, will continue to operate, as will its emerging markets credit strategies, which has $500 million, Gruver said.
The firm’s private equity group, which oversees about $2 billion, won’t be affected, Gruver said.
Corn closed the week 20.5 cents lower.
Last week, private exporters reported sale of 108,204 metric tons of corn to Mexico and 120,000 mt of sorghum to China.
Weekly export sales showed corn sales were 31.9 million bushels for both old and new crop.
New crop sales are 35 percent behind last year’s sales pace.
In the weekly crop progress and conditions report, USDA reported corn conditions up 1 percent to 70 percent good-to-excellent, slightly behind last year’s 75 percent ratings and above the average crop rating of 65 percent for this time of year.
Corn silking is at 78 percent.
Minnesota’s crop is rated 87 percent g/e, the third highest on record, while the crop in Illinois improved 2 percent to 57 percent g/e.
In August, watch the weather forecasts closely. If weather would turn hot and dry in the final kernel filling stage, we would have one final rally this summer.
Weather must turn adverse before Aug. 25 as after this date, our key yield development time will be over.
On the flip side, an early frost during the kernel filling stage would also send prices higher as a killing frost could potentially hurt yields.
The commodity funds have a net long of over 300,000 contracts and unless weather does turn adverse prior to Aug. 25, expect the funds to trim net long positions as the market prepares for harvest this fall.
Typical rallies in late summer are 30 to 50 cents, which would be an excellent opportunity to make additional catch-up sales if given the opportunity on production that can not be stored at harvest.
Seasonals show a small rally during the August timeframe, before turning lower as harvest begins in September.
Strategy and outlook: Producers are:
- 100 percent sold of the 2014/15 crop.
- Re-owned 50 percent with September calls, liquidate now.
- Sold 50 percent of 2015 production and own December puts on balance of production.
- Sold 20 percent of 2016 crop.
Soybeans closed the week 23.75 cents lower.
Last week, private exporters reported a cancelation of 200,000 mt of beans to China for the 2014/15 marketing year and 140,000 mt of beans sold to an unknown destination for
the 2015/16 marketing year.
Weekly export sales of soybeans totaled 48 mb for old and new crop.
New crop sales are 52 percent behind last year’s sales and at a nine-year low.
The weekly crop progress report showed soybean crop rating was unchanged at 62 percent g/e. While this is down from last year’s 71 percent rating, it is actually above the average crop rating of 60 percent.
Illinois and Indiana both improved 1 percent last week.
Pod-setting is 17 percent versus 31 percent on average.
August is the key yield development month for soybeans, not July.
For new crop soybean pricing, ignore demand signals as weather and its impact on the developing crop remains 95 percent of our pricing influence.
From Aug. 20 to Aug. 30 soybeans will have completely filled the pod, and seasonal highs will be in.
Beans need moisture in the pod-setting stage to achieve normal yields and forecasts into early August are for cool and wet conditions.
However, hot and dry conditions will force moisture to the root system, leaving the bean in the pod to develop small.
The soyoil content is what suffers most, leaving bean oil under-valued if hot and dry conditions set in across the Midwest.
Commercials are bullish to soybean oil.
Seasonally, soybeans post lows in the month of August in the first half of the month and rally into Labor Day where the highs will be formed before harvest pressure weighs on the market.
Strategy and outlook: Producers are:
- Sold 100 percent of 2014/15 production.
- Sold 50 percent of 2015/16 production and own November puts on balance of production.
- Sold 20 percent of 2016 November.
This material has been prepared by a sales or trading employee or agent of Midwest Market Solutions and is, or is in the nature of, a solicitation. This material is not a research report prepared by Midwest Market Solution’s Research Department.
Brian Hoops can be reached at (605) 660-1155.
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