Speculative net positions in grains in the week ending October 25 turned positive for the first time since July
With less than two months to go, a nail biting finish looms for investors: Will commodities finish 2016 higher for the first time in six years?
Over the past few years, the final quarter of the year has marked the moment when commodity markets have seen large outflows of funds. Investment withdrawals averaged almost $14bn the three years to 2015, while total returns on the widely followed Bloomberg Commodity Index (BCOM) averaged a drop of 8 per cent in the same timeframe.
This year the fourth quarter started on a weak note, with total returns on BCOM — which includes the “roll yield” or the gains made as investors roll over their position, and yields on collateral — falling 0.5 per cent.
However, this comes on the back of a more bullish backdrop than previous years, with inflows into commodity investments during the first nine months of the year setting new records at $62.3bn, according to Barclays. The BCOM total returns index is up almost 9 per cent over the same period.
The commodity index would have fallen further in October were it not for a rally in agricultural commodities, despite bumper harvests around the world. Grains posted a monthly gain of almost 5 per cent, supported by two factors — the large bearish bets by speculative investors and the substantial demand for grains and oilseeds, according to Mike McGlone, senior analyst at Bloomberg Indices.
The grain market was “well set up” for the bumper harvests this year, with hedge funds and speculators building up large bearish bets, says Mr McGlone. In wheat, the “short positions” were at a record high, while also near record highs in corn. This meant that even as the crops started to fill the bins, most investors were reluctant to increase their bets further.
Strong demand in soyabeans and corn, as well as a rally in wheat, was enough to trigger a large covering of the short positions, sparking a rally in grains and oilseeds. Thanks to lower prices, US exports have been especially strong this year in both corn and soyabeans.
Agriculture became the top contributor to BCOM’s 2016 performance thanks to the October rally, ahead of precious metals and energy. Soyabeans were the top single commodity contributor, accounting for about 110 basis points, or 13 per cent, of the total.
Last month’s price rise in grains and oilseeds came as energy dropped back 2.7 per cent and precious metals lost 4.5 per cent for the month. Oil started strong, with hopes of an agreed output cap between Opec and non-Opec producers pushing the international marker Brent above $50 a barrel. However, by the end of the month, a rush of producer hedging and pessimism around a possible output agreement weighed on the market.
Precious metals fell back on the expected tightening in the US, with gold falling through $1,300 a troy ounce at the start of October. Nevertheless for 2016, the sector is up almost 22 per cent, thanks to Brexit and uncertainty surrounding the US presidential elections.
Commodities’ performance for the rest of the year will hang on several events this month — the US presidential elections and the Opec meeting.
A Trump victory is likely to boost gold as investors seek havens in the face of uncertainty over policies. “There can be little doubt that global business and investor confidence would suffer in the wake of a Trump win,” says Julian Jessop at Capital Economics.
With energy being the largest market by value, the outcome of the Opec meeting at the end of November will be crucial to the annual performance of the market. At this point, the oil markets seem to be “setting themselves up for a binary outcome”, says Seth Kleinman at Citigroup. “They will likely be close to $45 in the event of no meaningful outcome or close to $55 in the event of some form of production freeze/cut,” he says.
As for agricultural commodities, the record supplies in grains and oilseeds continue to weigh on the markets. “The fundamentals haven’t changed,” says Stefan Vogel, head of agri commodity markets research at Rabobank. In terms of grains and oilseeds prices “the funds’ positioning seems to be done” he says, adding: “For many of the agri commodities for the next month or two, there is downside potential.”
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