Agri investors feel the sting of a good cropTight stocks coupled with strong consumption rates fueled a strong rally in agriculture markets in the opening months of 2014, with widely tracked agriculture and grain index benchmarks amassing close to 20 percent gains for the first four months of the year.
By: Gavin Maguire, Reuters
CHICAGO — Tight stocks coupled with strong consumption rates fueled a strong rally in agriculture markets in the opening months of 2014, with widely tracked agriculture and grain index benchmarks amassing close to 20 percent gains for the first four months of the year.
But since the first week of May, the most popular sector indices have lost more than half of those gains on the back of a strong start to the 2014 crop growing season and widespread profit-taking. What’s more, with grain markets anticipated to come under further pressure amid a broadly friendly growing outlook, investors still holding positions in these markets could opt to bail while still in the green rather than risk values slipping into negative territory.
Should that be the case, underlying market sentiment could sour even more, and fuel a further decline in prices that might keep speculative buying interest from returning any time soon.
After having declined by more than 20 percent in 2013, the most widely tracked U.S. investor index following agricultural markets — the S&P GSCI Agriculture Index — fell out of favor among investment advisers and money managers at the start of 2014, especially in comparison with the equities arena, which had gained roughly 30 percent in 2013 and was widely expected to maintain its rising trajectory into 2014.
Still, those investors who stuck with the agriculture index in 2014 were rewarded with a more than 16 percent advance in the first three months of the year; the strongest first-quarter performance by the SPGSAG in more than 20 years.
That was followed by a 3.6 percent advance in April, bringing the accumulated tally for the first four months of the year to nearly 20 percent. This marked a sharp outperformance of the S&P 500 equities index, which posted a less than 2 percent advance through the end of April.
But those gains proved to be fleeting. By the end of the first week of May, the tide turned on the agricultural arena in general, with grain and livestock markets alike all shedding gains at a steady pace over the remainder of the month.
The bleed-out has continued into June, with the SPGS Agricultural index down close to 9 percent since May 1 and the grains component of the index down nearly 10 percent. The S&P livestock index has slipped about 7 percent since May 1.
In contrast, the broader equity markets have advanced around 3 percent since the start of May, fueling chatter of investor rotation out of the agri commodities sector and into the broader stock market.
Play or fold?
Whether or not investor rotation has been taking place, those still holding agri market exposure have to decide to either stick with their ownership and risk further profit erosion if growing conditions remain friendly, or exit those positions while still posting a gain.
The degree to which investors potentially scale back investments in the sector should become apparent over the near term as the S&P Commodities indexes roll their futures contract exposure from nearby contracts to deferred months between June 6 and 12. Should the amount of buy orders flowing into the deferred months be materially lower than the amount of selling coming out of the expiring contracts, it can be assumed that some repurposing of assets is already under way.
Further clues about investor behavior can be gleaned from the Commitments of Traders data released by the Commodity Futures Trading Commission, which details the number of contracts held by the “massive passive” investors and managed money traders in particular commodities.
In the major crop markets, the combined net position held by both those investor groups remains near the highest level in two years, after having more than doubled since the start of the year.
In the meat markets, large speculative traders are sitting on near record net long positions in both hogs and cattle, indicating substantial room for long liquidation if market sentiment sours further or if additional price gains are deemed unlikely.
Given the strong impact that speculative money flow has on agricultural prices and sentiment, any decisive drop in investor buying interest in this arena could weigh heavily on prices heading into the remainder of the growing season.
Editor’s note: Maguire is a Reuters market analyst. The opinions expressed are his own.