$50 Billion in Long-Only Funds Flees Commodities Markets

Date: Tuesday, September 30, 2008
Author: Barani Krishnan, Reuters.com

 NEW YORK (Reuters)—Investments betting that commodity futures prices will move higher have drastically diminished over the past two months due to the global credit crisis, according to data released on Monday [Sept. 29].

The amount of so-called long-only money has shrunk by as much as $50 billion, with the sharpest drops in agricultural futures and oil markets.

Commodities seemed insulated from the slump in stocks and real estate through the first half of 2008, with oil racing to a historic high of nearly $150 a barrel by mid-July, fueling an inflation run-up in most other raw materials. But as the dollar rebounded from record lows against the euro and the U.S. banking crisis reached epidemic levels over the last 10 weeks, some of the most bullish investors in energy and agricultural markets began to flee.

"The tidal wave of investment into commodities which occurred in the first quarter has collapsed," CitiGroup said in a research note on Monday. It said that since July, the net long position has collapsed from $58 billion to $8 billion.

While investor interest in U.S. crude oil has hit its lowest level in more than two years, Swiss bank UBS noted that some of the sharpest fund outflows have thus far been money invested in agricultural futures through commodity indexes.

"Large outflows from agricultural index investments continue, this past week amounting to $1.44 billion," UBS said, basing its estimate on data released by the Commodity Futures Trading Commission. "Over the past quarter, index investors have sold $9.1 billion worth of agricultural index positions, reversing the inflows of 2007 and 2008."

The CFTC had estimated at the end of June that there was a total of $200 billion tied to index-related commodity investments, which included "short" positions, in which investors were betting on lower prices. CitiGroup estimated on Monday that total positions on commodities indexes had dropped to around $100 billion.

Eliot Geller of Jefferies Financial Products, who oversees the Reuters-Jefferies CRB commodities index, estimates a more conservative drop of $40 billion to $50 billion in total index positions since June.

Among agricultural futures, U.S. corn has seen some of the biggest declines in long-only money. The net-long index trader position in corn on the Chicago Board of Trade fell by 30,180 contracts since the week of Sept. 9, CFTC data shows. At 5,000 bushels per contract and CBOT corn trading between $5 and $6 a bushel in that period based on Reuters price graphs, corn had seen estimated outflows of $755 million to $905 million since Sept. 9.

Sept. 9 was the week before the U.S. banking crisis reached global levels following the bankruptcy of Lehman Brothers Holdings Inc., the distressed sale of Merrill Lynch to Bank of America and the government takeover of giant insurer AIG. The U.S. government has since proposed a $700 billion bailout, which was rejected on Monday by Congress.

CFTC data for the week to Sept. 23—the fortnight since the credit crisis escalated—shows open interest in U.S. crude oil dropping to its lowest level since August 2006. Among soft commodities, one of the sharpest drops in long positions has been in New York-traded raw sugar.

Not all commodities saw an exodus in long money, however.

Gold, regarded a safe-haven investment in times of trouble, saw a jump of 38,361 net long contracts held by speculators, who include those with index exposure, over the last two weeks. That accounted for a 46% rise since Sept. 16.

By Barani Krishnan