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In reversal, more investors short commodities

Published on January 10, 2013 3:01AM

Last changed on February 7, 2013 7:50AM


Capital Press

Investors who have been blamed for past surges in commodity prices are increasingly betting against crops like wheat, corn and soybeans in the futures market.

Negative sentiments among hedge funds and other speculators appear tied to broader economic worries, like the recent "fiscal cliff" concerns in Congress, rather than major shifts in the outlook for commodities, experts say.

"I really can't say the fundamentals have changed a whole lot," said Rich Nelson, research director for the Allendale brokerage firm. "At this point, it's more of a psychological issue than a supply-and-demand issue."

The number of "short" contracts -- bets that major commodity crop prices will drop -- has been increasing recently among investors, according to data from the U.S. Commodity Futures Trading Commission.

The shift has been particularly noticeable in wheat futures, which have slipped from roughly $9.50 per bushel in August 2012 to about $7.50 per bushel in January 2013.

In mid-August, the number of bets that wheat prices will rise -- "long" contracts -- outpaced the number of short contracts among "managed money" investors.

Such speculators held 130,000 long contracts and 60,000 short contracts for wheat in mid-August on the Chicago Board of Trade, the main exchange for the crop.

Now, the sentiment has largely reversed itself, with managed money investors holding about 79,000 long contracts and nearly 100,000 short contracts.

For corn and soybeans, long contracts still surpass short contracts but the number of bets that these crops will drop in price has spiked since mid-August.

Investors were jittery about consumer confidence if taxes increased and government spending was cut due to the "fiscal cliff," said Nelson.

Once Congress passed a compromise to forestall those possibilities, the stock market surged but the deal hasn't much affected the price of commodities, he said.

That's most likely because some investors are worried that U.S. monetary policy may become stricter, allowing the dollar to grow in value compared to other currencies and thus making U.S. crops more expensive on the global market, Nelson said.

Speculators may also feel that "things have run their course" in the recent commodity boom and will be skeptical about the prospect of rising prices unless new supply shortages occur, said Scott Cordes, CEO of CHS Hedging, the financial arm of the CHS cooperative.

Drought conditions in the Midwest have already been figured into investors' trading positions, he said. "How many times are you going to continue trading on them? You've got to throw the market something new."

Pension funds and similar investors have also been modifying their portfolios, said Henry Kornegay, principal broker at Jackson Commodities. "They're reallocating money from the futures market into equities and other investments."

As more speculators shift into short positions, the trend picks up momentum and "snowballs," said Mike Krueger, principal broker at MK Commodities.

"You get them running and pretty soon they're all running," he said. "That can feed on itself until it's run its course."

Some speculators rely on "mechanical black box approaches" to make short or long positions, relying on mathematical models of trends in commodity markets rather than economic fundamentals, Krueger said.

"There's a chart at the bottom of every sunken ship," he said. "It's a mob mentality."


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