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Are farm commodities losing their defensive allure?

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Are farm commodity investments losing their defensive qualities?

Agricultural commodities have often been viewed as one of the least risky bets in the volatile raw materials space, based on the idea that they are related to a necessity, rather than a luxury.

Even in the severest economic downturn, people still need food, even if they give up a car. And, as King Midas showed, you can't eat gold.

However, that idea did not protect agricultural commodities from investor outflows during the August liquidation.

Indeed, on some measures, they were viewed less favourably than energy and base metals, historically seen as more risky bets.

Fast money quits

In futures markets, index fund exposure to the main 12 farm commodities has fallen below $60bn, from approaching $70bn in August, analysis by Standard Chartered of official data shows.

And speculators in raw materials futures and options proved more downbeat on farm commodities than base metals, precious metals or energy.

Fast money sold out of soybeans, with net reduction of 47,000 lots in net length, faster than all other main commodities the week to last Tuesday, the latest regulatory data available show.

And the only major US-traded commodities in which speculators hold net short positions – New York coffee and Chicago soyoil and wheat - are in the agricultural sector.

'Outflows of $15m a day'

In exchange traded products (ETPs), a similar dynamic is evident too, with investors selling out of $400m of agricultural commodity ETPs so far this month, according to Societe Generale.

These products were hardly alone in suffering sell-offs during the collapse in market confidence following the US downgrade by Standard & Poor's, and amid persistent concerns about eurozone debt.

However, the outflow was stronger than the $100m exit from base metals ETPs, and a $700m net inflow into energy products.

In exchange traded funds relating to agricultural index products, rather than crops themselves, "outflows have been approximately $15m per trading day since May 12," StanChart analyst Koun-Ken Lee said.

Lure of gold

Does this represent the shaking off of non-traditional agricultural commodity investors who clamoured to crops at the start of the year, and might be quicker to quit when the going gets tough?

After all, farm commodity ETPs enjoyed net inflows of $1.3bn in February, more than all the other raw material classes.

Whatever, precious metals products are now proving the most popular among commodities, with net inflows of $2.5bn so far in August, amid fears of potentially a further round of economic stimulus debasing currencies.

Sure, the story of King Midas holds a lesson. But with 40% of US corn going into biofuels, as well as vegetable oils and wheat too, a stack of agricultural commodities aren't for food either.


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