Agricultural commodities may recapture some of their
investor appeal lost during the late-2012 sell-off, Societe Generale said,
rating Kansas wheat and lean hogs as its top bets in the complex.
Funds have quit positions in many commodity types, partly
thanks to a rush back into equities, towards which investors have their most
bullish positioning since February 2011, according to a Bank of America Merrill
"Bullish expectations on growth, profits and margins have
finally translated into higher equity allocations," BoAML said, contrasting the
clamour for shares with a mildly underweight position in commodities.
"The commodity complex is very much the forgotten asset
class thus far in 2013," the bank said.
Out of favour
In exchange traded products, agriculture and energy were the
two commodity classes to see net withdrawals by investors last month, Societe
"Agriculture saw outflows in all but soyoil, sugar and
coffee," the bank said, estimating the scale of the exit, which reflected a
trend last year, at $50m, leaving $4.1bn in place.
Investors cut exposure to ag-based medium term notes too, to
$4.6bn, implying a cut in net issuance of $500m over the month.
'Possible end to fund
However, the bank, referring to exchange traded products,
said that an improvement in fundamentals, evident in Friday's US Department of
Agriculture cuts to estimates for domestic corn and wheat markets, could
reverse the flow.
"The recent tightening of grain and oilseed markets and
optimism on growth may see a reversal of both energy and agriculture [outflows]
into January," SocGen said.
"Prices may also have a modest upward bias."
Separately, Paul Georgy, president of Allendale, said that "money flow into agricultural commodities seems to be one reason" for crop prices' more "positive" stance.
And rival broker RJ O'Brien said that "some evidence" of
fund buying in grains, helping them outperform the CRB commodities index, may
signal a "possible end to the steady fund liquidation that has prevailed since
the mid-August peak in managed fund grain longs".
In Chicago futures and options, managed money, a proxy for
speculators, has cut its net long in soybeans by one-third from the 2012 high,
and in corn by two thirds.
In wheat, they have turned from a net long position of more
than 80,000 contracts in August to a net short of 19,151 at the end of the
SocGen recommended Kansas hard red winter wheat futures as
one of its top bets for cashing in a potential revival in agricultural
commodities, noting the dry weather fears of which have revived this week, presenting
a "bullish" risk to prices.
It also recommended an "overweight" position in Chicago lean
hogs, forecasting a revival in pork prices in China, the main consumer of the
meat, which would improve the appeal of imports.
"Chinese imports of US pork have moderated, but should pick
up again through 2013," SocGen analyst Jeremy Friesen said.
In the US itself, prices are "still not high enough to spur
higher pig production" to offset extra demand pressure.
However, live cattle futures looked less likely to benefit,
short-term, and were likely to "take a pause through January", now the
Christmas demand surge is past.
"Slaughter demand should seasonally weaken through January, as
we move past the peak winter demand period, while the mild US winter weather
should continue to help boost weight gain efficiency and sustain seasonally
elevated slaughter weights," Mr Friesen said.
He recommended an underweight also in cocoa, given an easing
of concerns over weather in major producing countries Ivory Coast and Ghana.
"Current weather in West Africa remains positive for
near-term supply while economic growth in Europe should continue to limit
enthusiasm on the demand side.
"Though we could see a bit of a dead cat bounce, limited
upside and continued near-dated contango suggests cocoa should remain underweighted
against the broader commodity index through January."
Separately on Wednesday, chocolate giant Barry Callebaut forecast that cocoa prices would, short term, "trade on the low side of the
well-settled range of the past 12 months".