The revival in lean hog futures has quelled somewhat the further
boost to prices ahead posed by an annual rejig of index funds holding $115bn in
ags – although for Chicago wheat, support now looks set to be more marked.
Societe Generale - which a month ago named Chicago lean hog
futures as the commodity most likely to gain in price from January's index fund
reweighting process – flagged the changes in prices since across the complex
which have changed likely scenarios.
"Several factors including the outcome of the US
presidential election and the recent Opec meeting have caused significant moves
across many commodities," the bank said.
In fact, while expectations that Opec will agreed to extend
production cuts have sent Brent crude prices soaring back above $50 a barrel to
16-month highs, the impact on altering expectations for the fund reweighting is
For index funds to adjust their portfolio weightings in
Brent crude to the revised proportions issued by the Bcom and S&P GCSI
indices – a process which occurs over for one week every year, in 2017 from
January 9-13 – would equate to some 2.4% of average daily volumes in the
contract, a small change from the 2.0% estimated a month ago.
Less buying needed
However, for lean hogs, a revival in Chicago futures of 25%
from a 14-year low reached in October means that much of the price adjustment
needed for the contract to account for the correct proportion of the value of index
funds' portfolios has already occurred.
Index funds will still need to buy some $406m in lean hog
futures, equivalent to 21% of daily volumes over the average week for the contract.
But that is well below the purchases of $590m, equivalent to
34% of daily volumes estimated a month ago.
Nonetheless, such percentages "are still very significant and
will likely have a material impact on prices, curve structure and sentiment
ahead of, and also during the rebalancing period.
"The price impact on live cattle, lean hogs and zinc prices
could be the most significant across the commodity complex."
'Pretty good demand'
Lean hog futures have been revived by factors including surprisingly
firm US pork prices, running marginally above those a year ago, despite production
which has over the past month run 3.3% higher.
"Lower prices for pork earlier in the fall appear to have 'bought'
good demand going into the holiday season," said Paragon Economics and Steiner
"Robust export volumes also have helped clean up the market,
strong exports to Mexico despite a steady erosion in the value of the peso."
The global market has been supported by strong values in
China, the top pork producing, importing and consuming country, where hog
prices last week, at the equivalent of $2.31 a kilogramme, mean "producers are
still able to make an impressive $100 a market hog", according to Genesus.
"After all, almost 5% of China's breeding stock was culled
in 2015, and it takes time to get back to a supply demand equilibrium."
Chicago-traded live cattle now looks like being the contract
most affected by the 2017 rebalancing process, with $1.09bn of buying required,
equivalent to 22% of daily volumes, to ensure the lot has the correct weight in
index fund portfolios.
That figure, though, is down from the 27% estimated a month
ago, with live cattle futures having themselves also rebounded from multi-year
lows, helped by strong US exports.
"Extremely strong demand from a number of Asian markets continues to
drive exports of US beef this fall," Paragon Economics and Steiner Consulting
"And it is quite impressive that the robust export pace so
far has not been impacted much by the strong dollar," which makes US exports more
Wheat, coffee changes
By contrast, Chicago wheat looks more exposed to the reweighting
process, thanks to recent price falls, meaning that index funds need to buy
$600m of the grain to give it the right value in their portfolios.
That sum, equivalent to 8.9% of average daily trading
volumes, is up nearly $100m on the estimate a month ago.
Meanwhile, for New York-traded arabica coffee, which has
fallen sharply in value since mid-November, index funds now need to be a small
buyer in futures, of $101m, rather than the seller of $143m estimated a month