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Sugar a big winner of fund rejig - wheat a loser

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Soymeal and sugar are to be the biggest winners of an index fund reweighting exercise which may provide some - but only temporary - relief to poorly-performing soft commodities, Macquarie said.

Traders are beginning to prepare for an annual rejig in January at index funds in which they, primarily, rebalance their portfolios back in line with the weightings of the indices they track.

This will bring substantial buying in many poorly-performing commodities in 2012 – such as most soft commodities – to return their weightings to appropriate levels, with better-performing crops sold down.

As an extra twist for the early-2013 revamp, some indices are adding extra contracts into the mix, with the DJUBS index taking in Chicago-traded soymeal, with a 2.6% weighting, implying the purchase of more than 61,000 lots, on Macquarie calculations.

The index is introducing Kansas wheat at a weighting of 1.3%, in part at the expense of Chicago wheat, for which the weighting will be reduced by 3.4 percentage points.

"Substantial contracts will likely be sold off in commodities such as Chicago wheat, with further losses in soybean," Macquarie said.

Purchasing softs

However, the prospect of the revamp is being particularly closely watched in soft commodities in which another variety of investor, the speculator, have historically large short holdings, leaving futures vulnerable to a price spike if they are encouraged to take a round of position closing.


Soymeal: 61,553 contracts

Raw sugar: 39,741 contracts

Kansas wheat: 24,471 contracts

Coffee: 12,410 contracts

Cotton: 8,250 contracts

Source: Macquarie. Data relate to S&P and DJ UBS indices

According to Macquarie, using also data for funds following S&P indices, index funds will purchase more than 12,000 arabica coffee futures during the reweighting, besides more than 8,000 cotton lots and nearly 40,000 in raw sugar.

"[Index fund] exposure to coffee, sugar and cotton will increase due to their lacklustre price performance in 2012," the bank said.

'Could provide some support'

Expressed as proportion of open futures contracts, this implied in fact a bigger impact on the arabica market, with the futures bought equivalent to 8% of open interest, compared with 5.6% for raw sugar and 4% for cotton.


Chicago wheat: -76,404 contractsSoybeans: -44,284 contractsSoyoil: -14,961 contractsLive cattle: -12,727 contractsCorn: -10,955 contractsSource: Macquarie. Data relate to S&P and DJ UBS indices

However, it will not be enough on its own to spur significant short-covering by speculators, given "what remains a fairly unexciting price outlook for 2013", she added.

"In the absence of tighter fundamentals, [reweighting] alone will not be enough to encourage shorts to add significant enough new length."

'Structural surpluses are emerging'

Indeed, Macquarie was "struggling right now to see what it would take to encouraged managed money and swap dealers to cover their shorts and add new length", Ms Haque added.

"Structural surpluses are emerging for [coffee, cotton and sugar], which will likely maintain pressure on prices in 2013 too."

Raw sugar futures hit a two-year low earlier this month, depressed by a recovery in Brazilian output, after a rain-delayed start to the season, and the prospect of a world production surplus.

World coffee output is expected to return to surplus in 2012-13 and, with rains boosting Brazilian flowering, there are hopes of output remaining in surplus in 2013-14 too.

World cotton inventories are expected to end 2012-13 at a record, boosted by a recovery in production in countries such as the US at a time when demand is being curtailed by world economic malaise.


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