Funds 'fuel' ag rally, which lifts oats to record

A recovery in sentiment in agricultural commodities, which on Thursday took oat prices to a record high, may be being fuelled by a return of funds to the sector, a leading Chicago analyst said.

Rich Nelson, chief strategist at Allendale, said that recent movements in ag prices "seem to point to fund activity" in the markets, potentially as investors switch from stocks.

Share markets have made a weak start to 2014, billed as the worst in four years in Europe and the worst ever on emerging markets, amid concerns over the impact on developing market economies of the tapering of US quantitative easing.

"We have seen stock markets collapse," a factor which have bought "outside money into grains," Mr Nelson told

While price strength has been most noticeable in arabica coffee futures, which have risen nearly 30% so far in 2014, and oats, up 31%, it may also be apparent in smaller moves.

"You are seeing a rising corn prices, without much bullish news to support it," Mr Nelson said.

Ag algorithms

At rival broker RJ O'Brien, Richard Feltes, who alerted investors last month about the potential for a switch in cash from shares to agricultural commodities, said he had yet to see any evidence of fund cash inflows.

"I have seen nothing official based on that," he said.

However, a trend he had identified was of high frequency trading funds "becoming more active in spread trading" in agricultural commodities, attempting to exploit the disparity in moves between futures contracts for near-term delivery and those covering months further ahead.

Factors such as the poor US weather have placed a premium on immediate delivery in some crops.

"Because of the movement and volatility in spreads, high frequency traders are seeing an opportunity, and tooling that into their algorithms," Mr Feltes said.

Record high

The comments came as March oat futures touched a record high of $4.63 ¼ a bushel in Chicago on Thursday, overtaking the previous top for a spot contract of $4.59 ¾ a bushel, set in July 2008.

They also gained an, unusual, premium of $0.20 a bushel over corn, over which oats have not closed since April 2002.

The jump in oat prices has been fuelled by logistical difficulties in Canada, where industrial unrest and harsh weather have added to the strain on a railroad system struggling to cope with demands from the oil industry, besides those created by last year's record wheat and canola crops.

The US is a structural importer of oats, with Canada the default supplier.

"Remember that nearly half US oat usage is imported from Canada," Mr Feltes said.

What goes up…

However, with better weather on the way, and the potential for settlement of Canadian rail union unrest, some commentators have cautioned on the threat of a sharp retreat in prices.

"The rise in oats looks short-term and artificial," in being supported by potentially temporary factors, Don Roose, president at US Commodities, said.

"We see this as a price spike."

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