Hedge Funds Buying Corn to Silver to Soy After Commodities Futures Decline

Date: Monday, August 22, 2011
Author: Maria Kolesnikova and Margot Habiby, Bloomberg

The rout that drove commodities to a nine-month low is proving irresistible to speculators anticipating that even slowing economic growth will cause shortages of raw materials.

Oil has risen 8 percent since plunging 25 percent in the two weeks to Aug. 9. Copper has rebounded 4.6 percent after sliding 16 percent. The Standard & Poor’s GSCI Enhanced Commodity Index rose 4.2 percent since bottoming almost two weeks ago. Goldman Sachs Group Inc. expects the gauge to gain 20 percent in 12 months, led by energy and industrial metals.

While mounting concern about the economy wiped more than $8 trillion off the value of global equities in four weeks, Commodity Futures Trading Commission data show hedge funds and other speculators increased bullish commodity bets by 2.5 percent in the week ended Aug. 16, the most in a month. Traders still expect production shortfalls in copper, corn and oil as emerging economies expand. Wagers on corn, silver and soybeans rose and those on oil were little changed.

“We still see the emerging world as continuing to grow, and although there may be this period of liquidation, it is going to be short term,” Ian Henderson, who manages $9 billion of natural resources assets at JPMorgan Chase & Co. in London, said in a telephone interview Aug. 11. “When things recover, I think that the commodities sector will once again be a leading, if not the leading, sector from an investment perspective.”

Bullish Bets

Net-long positions, or bets on higher prices, held by speculators in 18 commodities rose to more than 1 million futures and options in the week through Aug. 16, according to the CFTC in Washington. That’s a recovery from the previous week, when the balance of wagers declined 19 percent as oil prices fell amid delays in raising the U.S.’s $14.3 trillion debt ceiling, slower-than-expected economic growth and Standard & Poor’s Aug. 5 decision to cut America’s AAA credit rating.

Bullish bets fell 22 percent to 989,110 futures and options in the two weeks ended Aug. 9, 37 percent below the peak of 1.56 million contracts reached in September, CFTC data show. The decline was nowhere near the depths of the bear market of 2008, when economies were reeling from the worst global recession since World War II and the S&P GSCI Enhanced index fell 66 percent in the seven months through February 2009. The net-long managed money position plunged to 67,260 contracts in October 2008, data compiled by Bloomberg show.

Corn climbed 1.5 percent on the Chicago Board of Trade last week, gaining 67 percent in the past year. Soybeans increased 2.5 percent, for a 33 percent advance in the past 12 months. Silver, the precious metal most used in industry, rose 8.6 percent, extending its 12-month rally to 130 percent.

‘Trajectory Higher’

The gains reflect global demand and the inability of oil and mining companies to keep pace rather than a rebound in growth in the U.S., which consumes twice as much crude as any other nation. The U.S. Energy Department expects a 490,000 barrel-a-day global shortfall of crude oil and liquid fuels this year and 420,000 in 2012, according to its latest monthly report.

Brent crude rose 0.5 percent last week to $108.62 a barrel on the ICE Futures Europe exchange for a gain in the past year of 44 percent. It fell as much $3.47 today to $105.15 as investors bet that Libyan production may recover after rebels entered the capital to force out leader Muammar Qaddafi.

West Texas Intermediate oil for September settlement on the New York Mercantile Exchange dropped 3.7 percent last week to $82.26 a barrel, the cheapest of any contract available through the end of 2019. It rose 77 cents to $83.03 in electronic trading today on the New York Mercantile Exchange. Even after the slump, oil costs 14 percent more than a year ago.

‘Too Low’

“Oil market data continues to suggest that the trajectory for crude oil prices is higher into 2012,” New York-based David Greely and two other analysts from Goldman Sachs wrote in a report Aug. 18. “Oil prices fall sharply on downdrafts of weak economic data, only to rise as oil prices remain too low to balance current supply and demand.”

Goldman’s commodity researchers reiterated recommendations on Brent crude, copper, zinc, U.K. natural gas, soybeans and gold on Aug. 8. Zinc advanced 6.6 percent in the past year, while the rest rose 22 percent or more. Bets on higher prices shrank for gasoline, heating oil, sugar and copper in the week through Aug. 16, the CFTC data showed.

Copper demand will outpace supply by 639,000 metric tons this year, the most since 2004, Barclays Capital commodity analysts said in an Aug. 16 report, citing “labor strikes, weather, lower ore grades and technical problems.” The fastest expansion in supply in more than a decade next year still won’t be enough to meet demand, the analysts said.

Bullish Bets

Copper slipped 0.8 percent to $4.0025 a pound last week on the Comex, paring the past year’s gain to 19 percent. Bets that prices will rise outnumbered wagers they will fall by 2,536 contracts, CFTC data showed. Futures contracts anticipate prices above $4 from December through the middle of 2013.

Barclays also expects deficits in lead, nickel and tin for this year or next in part because of rising demand from China, whose gross domestic product grew 9.5 percent last quarter, outpacing every other major economy. China consumes 38 percent or more of global copper, aluminum, nickel and zinc supply, Macquarie Group Ltd. estimates.

Global corn stockpiles will drop 6.8 percent in the 2011-12 marketing year, a third annual decline, to 114.5 million metric tons as a record harvest falls short of demand, U.S. Department of Agriculture data show. Traders anticipate prices will continue to rise through July 2012, futures prices show. Wheat inventories will be lower for a second year and soybean stores will also shrink, the USDA says.

Soybean Rise

Hedge funds and other speculators increased bets on rising corn prices by 9.6 percent in the week through Aug. 16, CFTC data show. Bullish wagers on soybeans jumped 25 percent and those on silver 9.8 percent.

The U.S. economy grew at a 1.3 percent annual rate in the second quarter, below economists’ median forecast of 1.8 percent. The Commerce Department on July 29 cut its first- quarter estimate to 0.4 percent from 1.9 percent. There is a 40 percent chance of another U.S. recession, Bruce Kasman, chief economist at JPMorgan in New York, said in a Bloomberg Television interview on Aug. 19.

Not all the economic data have pointed to slower growth. Industrial production in the U.S. climbed 0.9 percent month on month in July, the most this year, the Federal Reserve reported Aug. 16. China’s industrial output rose 14 percent in July from a year earlier, the Beijing-based National Bureau of Statistics reported Aug. 9. The risk of a global recession may be “a bit higher” than one-in-three, Nobel economics laureate Paul Krugman said in an interview in Stockholm on Aug. 18.

Global Equities

It was mounting concern about recession that drove the combined market capitalization of global equities to almost $47 trillion on Aug. 19, from $55 trillion on July 24, data compiled by Bloomberg show.

Commodities don’t always correlate with stock markets. The S&P GSCI Enhanced index rose 36 percent in 2002 as the MSCI All- Country World Index of equities slumped 21 percent, and advanced 45 percent in 2000 as stocks slid 15 percent. They dropped together by about the same amount in 2001 and 2008.

Exxon Mobil Corp. (XOM), the world’s biggest listed producer of crude, fell as much as 22 percent in New York during a three- week rout to Aug. 9. The Irving, Texas-based company is trading at a multiple of 8.1 times earnings anticipated by analysts, the lowest since 2008, data compiled by Bloomberg show. Melbourne- based BHP Billiton Ltd., the world’s largest mining company, dropped 23 percent in London since July 22 and is trading at 6.4 times expected earnings, the lowest since January 2009.

Derailing Growth

Some investors are betting that economies will keep weakening amid mounting debts and rising unemployment. The Fed has held interest rates at a record low of zero to 0.25 percent since December 2008 and on Aug. 9 pledged to keep its target rate for overnight loans between banks unchanged through mid- 2013. European debt crises from Greece to Ireland may also derail growth across the continent.

Investors should focus on commodities “least vulnerable” to the European debt crisis and slower growth, including gold, corn and wheat, JPMorgan analysts said in a report Aug. 3. Barclays’s commodity-research team named copper, corn and oil as its top picks in a report Aug. 16, with gold as “additional protection” during “severe tension between tight commodity fundamentals and downbeat macroeconomic expectations.”

Growth won’t slow enough to resolve “supply constraints,” Morgan Stanley’s researchers said in a report Aug. 4. Oil demand will strengthen this quarter and precious metals will remain attractive, they wrote. The bank also favors copper, aluminum, corn and soybeans.

Exchange Traded

Gold surged as stocks slumped, rising to a record $1,894.80 an ounce today, with investors seeking the perceived safety of the metal. Holdings in exchange-traded products backed by gold reached a record high of almost 2,217 metric tons on Aug. 8, valued at about $132 billion, data compiled by Bloomberg show.

“There are a number of ominous signs around that suggest that the potential for financial crisis or some kind of disorderly sell-off is quite high again,” Brenton Saunders, who helps manage $1 billion at Sydney-based Taurus Funds Management Pty Ltd., said Aug. 12. “We’ve reduced the direct exposure to the markets of our investments very significantly,” increasing the cash holding to 35 percent from 15 percent, he said.

For now, economists aren’t anticipating a return to the slump of 2008. The U.S. will grow 1.75 percent this year, compared with a 0.3 percent contraction in 2008, the median estimate of 56 economists surveyed by Bloomberg shows. Emerging and developing economies will expand 6.6 percent this year, three times the pace of advanced economies, the International Monetary Fund said in June.

“What keeps us from getting too bearish over the medium term is the problem of supply,” said Poppy Allonby, who co- manages BlackRock Inc.’s BGF World Energy Fund, which held $6.3 billion of assets as of July 29, according to data compiled by Bloomberg. “We are seeing weakness in demand. But less attention is being paid to the supply dynamic. It is the balance of demand and supply that counts longer term.”

To contact the reporters on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net; Margot Habiby in Dallas at mhabiby@bloomberg.net