With drought in Brazil and flooding in Argentina threatening crops, the weather is getting nasty enough for hedge funds to take notice.
Money managers more than doubled their wagers on a rally for agriculture prices, pushing their holdings to the biggest since July, after betting on declines just last month. The investors are now the most bullish on soybeans since May 2014 and trimmed the bets on declines for corn for the fifth time in six weeks. The Bloomberg Agriculture Subindex of eight farm products is heading for its best April rally since 2009.
Dryness is such a problem for the corn harvest in Brazil, the third-largest exporter, that the government suspended import tariffs for six months, signaling it may have to import the grain. Excessive rains in Argentina, the third-largest soybean grower, prompted the nation’s two biggest exchanges and the agriculture ministry to cut outlooks for the crop. Adding to the positive outlook for prices is China’s stabilizing economy and a weaker U.S. dollar that boosts the appeal of supplies from American farmers.
“Now that we’ve started planting, we’re thinking about how the growing season will pan out, and we’re putting some more risk premium into the market, it’s been beaten down so much,” said Chris Narayanan, the head of agricultural research at Societe Generale SA in New York. “If the weather gets worse in Brazil and you have hot, dry weather in the U.S., you could see another massive rally.”
Combined positions across 11 agricultural products rose to 368,088 futures and options in the week ended April 19, according to U.S. Commodity Futures Trading Commission data published three days later. That compares with 177,770 a week earlier.
The Bloomberg Agriculture Subindex climbed 1.5 percent last week, after reaching the highest since July. The recent price gains have stoked speculation that futures may be bottoming after reaching multi-year lows this month. Market participation expanded amid the rebound, with surging trading volumes and rising open interest.
The Buenos Aires Grain Exchange cut its forecast for Argentina’s soybean crop by 6.7 percent to 56 million metric tons, after parts of the country received six times the normal amount of rain in April. The country is the biggest exporter of soybean meal and vegetable oil. In Brazil, some states have gone a month without rainfall, which may bring woes to the safrinha, or second corn crop, that’s approaching pollination and grain-filling stages, Brett Wong, an analyst at Piper Jaffray & Co., said in a report.
As conditions deteriorate for South American crops, threats are increasing to U.S. growing areas. The shift from El Nino to La Nina weather patterns may come as early as July, Wong said. That would mean higher summer temperatures and drier U.S. conditions, potentially lowering yields for corn and soybeans. Rains in American cotton areas have already disrupted plantings of that crop, and investors more than doubled their net-long position in the fiber to the highest since February.
Ample global inventories can help cushion crop losses from inclement weather and limit price rallies. While the Bloomberg Agriculture Subindex rose last week, the measure tumbled 3 percent on Friday, the biggest drop since August. The ratio of corn stockpiles to demand will be elevated for the season that starts this year, Goldman Sachs Group Inc. said in a report last week. The bank said it was bearish on corn and soybeans and cut its outlook for wheat prices.
While South American crop concerns helped boost prices in recent weeks, traders may turn their focus to U.S. planting soon, where weather is favorable, said Fiona Boal, director of commodity research at Fulcrum Asset Management in London, which oversees about $4 billion.
For now, “it’s been an impressive and swift move off some pretty horrid levels, so farmers are going to be sitting on their planters with a big smile,” Boal said.