With excesses building in everything from cotton to wheat, hedge funds can’t seem to get away from crop markets fast enough.
Bumper global harvests and slowing demand will push combined inventories of corn, soybeans and wheat to a record, according to U.S. government data. Those bountiful supplies prompted money managers to lower their bets on higher prices for a fifth straight week, U.S. government data show.
Trading has become more volatile as prices have dropped. The Bloomberg Agriculture Index of eight farm products has declined 17 percent this year, with the measure’s 60-day volatility reaching the highest since 2012 on Monday.
“We’ve seen the volatility in the agricultural space as of late,” said Paul Springmeyer, a Minneapolis-based senior portfolio manager at Private Client Reserve at U.S. Bank, which oversees $127 billion. “Most people are trying to rein in the risk in their portfolio, and one way of doing it is just avoiding the space.”
Combined positions across 11 agricultural products fell 21 percent to 183,929 futures and options in the week ended Aug. 18, U.S. Commodity Futures Trading Commission data show. The holdings have dropped 67 percent in five weeks.
Supplies expanded after the Bloomberg Agriculture Index surged to a record in 2008 amid booming demand from China. Higher prices prompted farmers to increase output, sometimes with the benefit of government subsidies. Food costs tracked by the United Nations fell for a ninth month in July, the longest slump in more than a decade.
The U.S. Department of Agriculture this month unexpectedly raised its estimates for the domestic corn and soybean crops. In France, grain supplies are so abundant that silo operators are saying they can’t store any more. In South America, declining currencies are encouraging exporters to ramp up shipments of sugar and coffee that fetch dollars in return.
Weather can wreak havoc on supply. El Nino, which could bring excessive rainfall to South America, and dryness to parts of Asia and the Pacific, is growing stronger, Australia’s Bureau of Meteorology said last week.
The results of a Midwest crop tour shows that the USDA may have overestimated the size of this year’s harvest. Corn and soybean crops will probably be smaller than forecast by the government after wet weather stunted growth, Iowa-based Pro Farmer said Friday, after a four-day tour of fields.
“People have already discounted the larger supply issues that have been there,” said Donald Selkin, who helps manage about $3 billion as chief market strategist at National Securities Corp. in New York. “Maybe they have not discounted the potential for lower yields.”
Stockpiles can help to cushion the impact of adverse weather. The USDA expects combined inventories of corn, soybeans and wheat to rise for a third straight year.
The expanding gluts in crop markets mirror a trend across raw materials. The Bloomberg Commodity Index has tumbled 18 percent this year to the lowest since 1999, with more than half of its 22 components stuck in bear markets.
“Commodity investors are under a lot of pressure right now,” said Kelly Wiesbrock, a portfolio manager at Harvest Capital Strategies in San Francisco, which oversees $2.2 billion. “It’s hard to see these factors changing materially enough to make a huge correction.”