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Cattle, coffee, cotton prices vulnerable in index rejig

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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.


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