Linked In
News In

You are viewing 1 of your 2 complimentary articles.

Register now to receive full access.

Already registered?

Login | Join us now

Cattle, coffee, cotton prices vulnerable in index rejig

Twitter Linkedin

Prices of futures in coffee, cotton and live cattle look particularly vulnerable to distortion from the annual commodity index reweighting process, which will "likely have a material impact" on values, Societe Generale said.

Some $11bn in investment flows, according to SocGen calculations, will be provoked by the reweighting of the two main commodity indices, the BCOM and the S&P GSCI, between January 8 and 14 next year.

While the biggest amount relates to Brent crude - whose greater weightings, lifted from 6.51% to 7.16% on the BCOM alone, imply $2.39bn in flows – this represents a relatively small amount compared with average daily trading volumes, equivalent to some 2.5%.

However, for arabica coffee, the negative $1.52bn implied by its decreased weightings, even when spread over the five days of the index rejigs, equates to some 30% of daily volumes.

Cotton, whose increased overall weighting implies an inflow of $215m, will see trade equivalent to 14.3% of daily volumes, with the proportion for live cattle, set to lose $844m through its reweighting, is 11.4% of daily volumes, SocGen said.

'Material impact on prices'

"These percentages are significant, and will likely have a material impact on prices, [futures] curve structure and sentiment," SocGen said.

For live cattle, the exercise will also "pressure the spread between live cattle and feeder cattle", with the latter seeing an increase in its weightings, of $76m, equivalent to 4.6% of daily volumes.

The impact of the rejigs will be felt ahead of the actual reweighting exercise, as well as during it, with some investors "anticipate the potential impact the reweighting process might have" on prices of futures, or spreads between them.

The bank added: "Index trading is typically price insensitive, with trading usually occurring at the closing/settlement price of the day.

"As such, price moves can be exaggerated during this [reweighting] period and can often provide attractive trading opportunities."

Annual process

Index operators say that their annual reweighting process is needed to maintain their relevance to the underlying sector, with liquidity in the futures and output of the commodity among variables used to determine adjustments.

BCOM says that its index rules "generally account for liquidity and production data in a 2:1 ratio".

Furthermore, indices are adjusted to ensure that no one contract becomes too dominant, as would happen with a large price spike in the commodity.

BCOM limits to 15% the proportion of the index that any one commodity can account for, with gold the top component next year, with an 11.9% weighting.

Extra price distortion can come as the funds investing through the indices - with the BCOM and S&P GSCI attracting an estimated $85bn between them – rejigging weightings to take them back to the level specified by the index.


Twitter Linkedin
Related Stories

Evening markets: South American double whammy brings ags back down to earth

Ags lose early gains, undermined by a tumble in Brazil’s real, and falling rain in Argentina. Still, wheat futures remain in positive territory

Wheat leads respectable week for US crop exports

Sales of hard wheat - spring and winter - prove particularly strong. Cotton export data return to type - ie with strong sales but...

Can cotton prices extend their rally?

History suggests futures will not stay long in the 70s cents a pound. So which way will they trend?

Morning markets: Hard wheat regains premium over soft, amid US dryness worries

Kansas City wheat outperforms, as Plains precipitation worries extend to a dearth of snow cover. But Kuala Lumpur palm oil hits a 16-month low
Home | About | RSS | Commodities | Companies | Markets | Legal disclaimer | Privacy policy | Contact

Our Brands: Comtell | Feedinfo | FGInsight

© 2017 and Agrimoney are trademarks of Agrimoney Ltd
Agrimoney is part of the Briefing Media group
Agrimoney Ltd is registered in England & Wales. Registered number: 09239069