Sep 23, 2014
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Agriculture ETPs Losing Investors on Record Harvest

September 1, 2014
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The investment binge in U.S. agriculture funds has ended as record crops and the promise of improving meat supplies send prices plunging.

After taking in more money than precious metals or energy funds during the first five months of 2014, exchange-traded products backed by agriculture had a net outflow for the year of $57.7 million as of Aug. 29, down 2.9 percent, data compiled by Bloomberg show. Energy, precious-metal, industrial-metal and broad-based funds saw net inflows over the period, boosting total raw-material investment by $341 million, or 0.5 percent.

While coffee, cattle and hogs posted gains that beat most commodities this year, prices for cotton, soybeans, corn and wheat fell into bear markets. Speculator bets on an agriculture rally are down 78 percent since early April as farmers in the U.S., the world’s largest grain grower, prepare to collect what the government predicts will be record harvests. Global food costs fell for four straight months through July.

"We’re coming up on what could be one of the biggest crop years ever," Kurt Nelson, a founder and partner at SummerHaven Investment Management in Stamford, Connecticut, said in an Aug. 28 telephone interview. The SummerHaven Dynamic Commodity Index holds about $850 million. "There’s more certainty now about the success of the crop," Nelson said. "It looks like we’re not going to have any surprises."

Record Crops

As recently as the end of May, after rains caused planting delays that sparked a crop-price rally, U.S. agriculture ETPs tracked by Bloomberg had a net in-flow of $45.8 million for 2014. At that point, precious-metals funds had a net outflow of $380.5 million and energy funds had lost $12.7 million, while industrial metals were up $48.6 million.

Near-ideal weather followed, and farmers now are expected to reap a record 14.032 billion bushels of corn and 3.816 billion bushels of soybeans, the U.S. Department of Agriculture said Aug. 12. Crop conditions on Aug. 24 were the best for that time of year in at least two decades, the USDA said. Futures for both commodities touched four-year lows on the Chicago Board of Trade since the end of June and are down more than 30 percent from this year’s highs.

Prospects for cheap feed grain has pared gains for cattle and hog futures. While prices are still up, ETPs linked to livestock have a net outflow of $10.2 million as of Aug. 29, down 19 percent for the year, compared with a net inflow on May 30 of $3.2 million, data compiled by Bloomberg show.

Less Bullish

Money managers whose net-long positions across 11 different agricultural commodities surged to 1.1 million futures and options contracts in early April, the most since 2010, had cut their bullish holdings to 248,335 contracts by Aug. 26, according to U.S. Commodity Futures Trading Commission data going back to 2006. The speculators were bearish on soybeans, cotton and sugar.

The Bloomberg Agriculture Index of seven farm products, excluding livestock, has tumbled 21 percent since the end of April, as all prices fell. The Bloomberg Commodity Index of 22 raw materials slid 8.1 percent over the same period, while the MSCI All-World Index of equities gained 4.2 percent. The Bloomberg Treasury Bond Index rose 2.1 percent.

As most crop futures dropped, some metals rose. Copper futures posted four straight months of gains through July, the longest rally for a most-active contract since 2011, as global stockpiles fell to the lowest since 2008. Aluminum is up 16 percent, off to its best start to a year since 2009. Gold futures gained 7.1 percent this year to $1,287.40 an ounce, as conflicts from Ukraine to Gaza to Iraq spur demand for a haven.

ETP Rebound

U.S. ETPs backed by precious metals have seen a rebound since May, with a net inflow this year of $123.3 million as of Aug. 29, data compiled by Bloomberg show. Industrial-metals funds are up $105.5 million, energy funds have a net inflow of $154.7 million, and broad-based funds are up $25.3 million.

Agriculture may still rebound. Corn and soybean harvests won’t start for another few weeks in the U.S., so there’s still the risk of weather damage from rain or frost for the nation’s two largest crops.

The Pro Farmer Midwest Crop Tour pegged the soybean crop at 3.812 billion bushels, less than the USDA estimate, noting crops in Minnesota and South Dakota looked "average," the group said Aug. 22. Wheat futures rose 0.2 percent last week, the first gain in three, as fighting expanded between Ukraine and Russia. The two countries will account for a fifth of global exports this year, the USDA estimates.

"We’re at the low end of the grain-value range," said Ashmead Pringle, president of Atlanta-based GreenHaven Commodity Services, whose Greenhaven Continuous Commodity Index Fund oversees about $350 million. "The grains are going to see some strength going forward."

Texas Drought

More than a third of Texas, the largest cotton and cattle producing state, remains in severe drought as of Aug. 26, according to U.S. Drought Monitor. Cattle futures are up 12 percent this year, feeder cattle have rallied 29 percent, and hogs have gained 15 percent as producers were slow to rebuild herds, even as cheaper grain reduces the cost of animal feed.

Coffee production in Brazil, the world’s top grower, may drop as much as 18 percent as a prolonged drought plagues growing areas, the National Coffee Council said. Arabica-coffee futures have surged 82 percent this year.

Bumper Crop

For now, the weather is primed to promote crop growth, and the USDA on Aug. 12 raised its estimates for U.S. beef and pork production this year, citing cheaper feed.

Through August, the Bloomberg Commodity Agriculture and Livestock Index posted four straight months of losses, reversing four consecutive advances at the start of the year that marked the longest rally since 2010.

"In the agriculture space, the more you produce, the lower the price will be," Darwei Kung, who helps manage $710 million for the Deutsche Enhanced Commodity Strategy Fund in New York, said in an Aug. 28 interview. "We do see people’s interest in ETFs move exactly the same way. This year is going to turn out to be a very strong production year for all of the grains and a lot of agricultural products."

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