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Prospects ease for index fund buying of hogs - but rise for corn, wheat
By Mike Verdin - Published 05/01/2017

The revival in lean hog futures has slashed the buying the contract will attract from the annual shake-up by index funds of their $115bn portfolios - although cattle, corn and wheat should still see notable support.

Societe Generale, updating analysis on the implications for next week's index fund reweighting process on commodity markets, slashed by 58% to $237m the amount of cash the rebalancing will inject into Chicago lean hog futures.

The annual, five-day rebalancing procedure sees index funds adjust their portfolio weightings to those of the index followed, such as the Bcom or S&P GCSI.

This process often involves buying the laggards of the previous year, and selling the top performers, besides making adjustments to account for changes made to the headline index weightings, which are adjusted annually to account for factors such as contract liquidity.

'Excellent demand'

The need for index funds to boost exposure to the lean hog market through the process has been reduced by the strong recovery in futures, which have bounced 59% on a front contract basis since hitting a 14-year low in October.

The revival has come against a recovery in pork prices, which "moved counter-seasonally higher in December", Paragon Economics and Steiner Consulting said, flagging "excellent demand from both domestic [US] and export channels.

"The latter cannot be overstated in our view.

"The weekly [US] export numbers have revealed how strong Mexican demand in recent weeks, which largely translates into robust demand for hams."

Buying league

Index funds will still, over the five-day portfolio rejig, need to buy contracts equivalent to 11.0% of average daily volumes in lean hogs, on SocGen analysis.

However, this is below the 21% figure which had appeared necessary on calculations made one month ago.

And it puts lean hogs well behind live cattle, and Kansas City-traded hard wheat too, in the league of agricultural commodities likely to attract most buying.

Kansas City wheat will attract buying equivalent to 14.4% of daily volumes, a figure marginally higher than appeared necessary a month ago.

'All whipped up'

For Chicago soft red winter wheat - lined up for $537m of index buying, equivalent to 10.1% of average daily volumes the buying push has also grown, from a figure of 8.9% of daily volumes calculated last month.

For corn, buying estimates of $1.01bn and 8.0% respectively, are more in line with those a month ago.

The prospect of buying by index funds and indeed of front-running by other investors anticipating the process has been a market focus of late, with many observers seeing it as behind a strong start to 2017 for corn futures, for instance.

"The fund community is all whipped up about some decent-sized buying that will need to happen in corn and wheat," said Joe Lardy at US broker CHS Hedging, if adding that for soybeans, rebalancing looks like proving less significant.

"The soybean rebalance is almost nothing and should not have any effect on the markets."

In fact, soybeans will attract $375m of buying during the reweighting process, equivalent to 1.3% of daily volumes, on SocGen calculations.

Among New York-traded soft commodities, index funds are poised to be small buyers in coffee and cotton, with purchases equivalent to 2.0% and 1.9% of daily volumes, but seen substantial sellers in raw sugar to the tune of $332m, or 9.7% of typical daily volumes.

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