Mounting hedge fund interest ‘to boost ag market volatility’ ahead

Volatility lies ahead for agricultural commodity markets thanks to the growing influence of speculators –  with the prospect of a stronger dollar and weaker oil also fuelling price moves, Commerzbank said.

One impact of the recovering inflation expectations, which are spurring ideas for US interest rate rises ahead, will be to increase the appeal to speculators of commodities, which might see their own values rise.

“Managed money will be looking for yield,” seeking to boost returns and keep ahead inflation, Eugen Weinberg, head of communications at Commerzbank, told Agrimoney.com’s AgriRisk Forum in London.

‘Susceptible to popular delusion’

The impact of this money flow will be to boost price swings, with funds often tending to follow market trends, so exacerbating moves of values.

“We do not think they are driving price [trends],” Mr Weinberg said.

“But there are susceptible to popular delusion. Often, they are not digging deep enough to have a clear understanding” of market fundamentals.

The additional fund interest “will create greater volatility going forward” in ag prices.

‘Market is too one-sided’

An extra twist to this outlook, speculators are entering this period with positions which, in many agricultural commodities, appear extreme by historical standards, raising the potential for a sharp reversal in prices if the news flow reverses.

In corn and wheat, for example, in which managed money has large net short positions, according to US regulatory data, “the market is too one-sided” in favouring bearish bets, Mr Weinberg told the forum.

“Most of the negative news has been priced in by investors,” meaning that, “the risk to the upside [for values] is much larger than the downside.”

For coffee, cotton and soybeans, by contrast, in whcih investors are “extremely optimistic… the risk to the downside is greater than in the grains”.

And when speculative positions get to a “big number, the next big move [in prices] is likely to be in the opposite direction”, landing many funds with losses.

Dollar, oil price outlooks

Mr Weinberg added that he was expecting further appreciation in the dollar, backed by expectations of rising interest rates – in contrast, for example, to forecast for further monetary policy easing in the eurozone, Japan and the UK.

Oil, by contrast, could fall, potentially to $35 a barrel, given comfortable output, whatever the Opec producing cartel may decide.

“Opec is no longer the marginal producer,” Mr Weinberg said.

One threat to the outlook for oil price weakness was of further unrest in major producing countries, with Mr Weinberg noting that in the likes of the Middle East “political and ethnic borders are very, very different”.

Agrimoney

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