Hedge funds may be in retreat from agricultural commodity
markets - with a "disastrous" bet on corn futures adding to the pressures on
profitability raised, ironically, by their own success, a former Chicago Board
of Trade director said.
Ann Berg, also the first recorded female grain exporter, said
that the retreat in hedge funds' net long positions in major US-traded agricultural
commodities in April to their lowest since 2006 may be a sign of waning
interest in the sector.
In particular, she flagged that the drawdown – which has
since reversed somewhat – came even as agricultural commodity prices rose, appearing
a signal that "funds were sounding a retreat from the sector".
The position data "do illustrate a change in hedge fund
behaviour", said Ms Berg, now an advisor on crop markets to governments and
organisations such as the FAO, the UN food agency.
'Long bet turned
A withdrawal would be consistent with hedge funds' declining
profitability from crop positions.
Commodity hedge funds recorded negative performances in both
2011 and 2012, disappointing investors who withdrew about 20% of their cash
last year, according to Newedge.
"By 2011, the performance of the commodity hedge funds
declined and their positioning in agricultural futures no longer seemed to be
predictive of market trends," Ms Berg said, with speculators appearing to have
been caught out particularly this year in the Chicago corn market.
"Hedge funds enlarged their long position in corn in
anticipation of a bullish US Department of Agriculture planting intentions report.
"The long bet turned disastrous when, in March, the USDA
announced potential record corn production for 2013, causing a two-day sell-off
of about $40 a tonne."
Hedge funds have also been victim of their own success, in muffling
the volatility which the exploited to great profit during the crop price boom
and bust in 2008-09.
Hedge fund algorithms "might have been instrumental in reducing
the level of price volatility… especially those specializing in arbitraging
market anomalies," Ms Berg said.
"High volatility – peaking at 80 during the food crisis ﬁve
years ago but declining to levels around 12–20 for most of the past year and a
half – was most likely a signiﬁcant factor in commodity hedge fund success in
The comments came as the UN FAO itself forecast calmer grain
markets ahead, thanks to the prospect of a rebuild in world cereals stocks to
their highest in 11 years.