Hedge Funds Slash Bullish Commodity Bets Most in Eight Months

Date: Tuesday, March 22, 2011
Author: Elizabeth Campbell and Whitney McFerron, Bloomberg

Hedge funds cut their bullish bets on commodities by the most for any week since June as Japan’s nuclear crisis threatened the global economic recovery.

In the week ended March 15, an index of managed-money net- long positions, or wagers on rising prices, in 18 commodities tumbled 14 percent from a week earlier to 1.27 million U.S. futures and options contracts, government data compiled by Bloomberg show. That’s the biggest drop since the week ended June 29, and the smallest net-long holdings since early August.

The Thomson/Reuters Jefferies CRB Index touched a one-month low on March 16 as Japan, the world’s third-largest economy, fought to contain the risk of a nuclear crisis following an earthquake and tsunami that killed thousands. Before the temblor struck on March 11, the CRB gauge had jumped 6.5 percent in 2011, outperforming equities and bonds.

“The situation in Japan prompted a lot of investors to take profits after a fairly good run in commodities,” said Brian Hicks, who helps manage $3 billion at U.S. Global Investors in San Antonio. “This is a short-term headwind for further upside in commodities. We’re still going to see industrialization and urbanization in emerging markets.”

Copper will average $4 a pound this year, and crude oil won’t dip below $90 a barrel, while other commodity prices including corn and wheat will remain elevated, Hicks said. Investors will buy gold to hedge against inflation as developed countries keep interest rates low to spur growth, he said.

Funds May Return

Hedge funds may return to the commodity markets in the next few weeks and ramp up bullish bets, said Jeff Bauml, a senior vice president at R.J. O’Brien & Associates, a broker in New York.

In the week ended March 15, the CRB tumbled 6.4 percent amid growth concerns. In the next three days, the gauge rebounded 3.8 percent. The CRB gauge rose 0.6 percent to 353.24 at 2:52 p.m. in New York, after touching 354.44, the highest since March 10.

“There’s renewed confidence,” Bauml said in a telephone interview.

Hedge funds cut bullish bets on corn futures and options traded in Chicago by 17 percent in the week ended March 15, the most since June 2010, data from the U.S. Commodity Futures Trading Commission show. Managers slashed net-long positions in cattle by 8.7 percent to 89,540 futures and options contracts, the lowest since July, the government data show.

“There’s concern that we might have Japan, in the short- term, not buying corn,” said Christian Mayer, a market analyst at Northstar Commodity Investments Co. in Minneapolis. “There were some people just liquidating everything.”

‘Too Carried Away’

The selling may not be over, said Troy Vetterkind, the owner of Vetterkind Cattle Brokerage in Chicago.

“There’s still more liquidation to come,” he said. “The cattle market got too carried away to the topside. You’re going to see more money leave.”

Global food costs rose to an all-time high in February, the United Nations said. The higher prices contributed to riots in North Africa and the Middle East that toppled leaders in Egypt and Tunisia.

Before today, corn soared 82 percent in the past year on the Chicago Board of Trade, while wheat climbed 48 percent. Cattle jumped 17 percent in the past 12 months on the Chicago Mercantile Exchange and touched a record $1.18 a pound on March 9.

The rally in grains was fueled by adverse weather that damaged global crops. Cattle and hogs gained as higher feed costs limited supplies and the global economic recovery boosted demand for meat in emerging economies.

“In the end, we’re still in a corn market that needs to ration demand,” Mayer of Northstar said. “I wouldn’t be surprised if people got back” into the markets, he said.

Managed-money positions include hedge funds, commodity- trading advisers and commodity pools. Analysts and investors follow changes in speculator positions because such transactions may reflect an expectation of a shift in prices.

To contact the reporters on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net; Whitney McFerron in Chicago at wmcferron1@bloomberg.net