Drought drives investors back to grain funds after long exodus

Date: Friday, August 10, 2012
Author: Barani Krishnan, Reuters

Investors who had fled agricultural commodity funds for more than a year rushed back in droves last month as the worst U.S. drought in more than half a century caused prices to surge, data from fund tracker Lipper showed on Friday.

Exchange-traded funds and other security products that track agriculture-focused futures or indexes recorded an inflow of just below $110 million in July, the highest since March 2011, according to the data. Flows turned positive in June, ending a 14-month streak in which investors slashed bets by billions.

Early indications are that more money will be coming into the funds in August, said Matthew Lemieux, a research analyst who helps compile the data for Lipper, a Thomson Reuters company.

"I think there should be more inflows if we're going to track the persistent rise in agricultural prices," Lemieux said. "The consensus is that we'll see flows rise until we see some change at least in the U.S. drought and other conditions that are pushing prices up globally."

Corn futures in Chicago have risen nearly 30 percent so far for the quarter, while soybean futures have gained almost 15 percent, responding to the drought that has severely cut yield potential in the two crops.

Prior to June, when the drought set in, investors had pulled a total $2.7 billion out of agricultural funds due to prolonged drop in grains prices.

COMMODITY EXODUS

The gains for ags-focused funds came during a month in which investors largely shunned the commodities sector, with an aggregate net outflow of $1.8 billion in aggregate for July, reversing June's inflow, according to the data based on more than 230 U.S.-regulated commodity products and funds.

The biggest outflow came from the SPDR Gold Shares, which saw $1.4 billion exit. Energy-specific funds were also big losers, with $256 million in outflows.

While agricultural fund inflows are on the rise, their total net value is a far cry from a year ago, standing at just around $2.76 billion in July versus $6.4 billion in March 2011, the data show. That represents just 1.7 percent of the total $160 billion in commodity fund holdings.

"It surprises me that investors are so under-represented in agriculture versus other commodities," said Sal Gilbertie, president of Vermont-based Teucrium Trading, which is among the only funds that run single-commodity ETFs devoted to major grain and oilseed contracts.

"There's no doubt that this drought has highlighted to people the importance of making sure they have an agricultural presence in their portfolio."

Inflows at Teucrium's three ETFs for corn (CORNiv.P), soybeans (SOYBiv.P) and wheat (WEATiv.P) almost doubled in July, to just under $130 million, from nearly $70 million in June, making them among the biggest agricultural gainers in the Lipper data.

Lipper's data typically does not include fund holdings of over-the-counter indexes or direct investment in futures or physical commodities, or hedge funds.

Its historical data also includes only funds currently in operation. The products and funds it tracks invest in physical commodities or derivatives and not in corporate securities.