It's a hard summer for soft commodities

Aug 17, 2010

The current period of market volatility for agricultural commodities seems to be abating as the rains fall, but CTA strategies have suffered and the outlook remains unpredictable.

If you aren’t on a wheat-free diet, the last couple of weeks might have given you reason to start one. Commodity trading advisor (CTA) fund managers will certainly be feeling a little queasy.

Chicago wheat reached a two-year high of $8.41 on August 6. The price has fallen 21% to $6.64 since then, but is still up 60% since early June.

The decline was due to traders taking profits off the table as rains fell in Russia, which gave hope that the current drought there would be alleviated. The drought’s effect on wheat production led the government at the start of the month to temporarily ban wheat exports and trim production forecasts by almost 40%, although there are now rumours that Russia may now honour some of its export contracts.

Corn, soybean futures and pork bellies have also been moving in tandem, although wheat witnessed the most exaggerated movements. (The corn price is now being squeezed upwards due to hot weather in the

and a cut in sales from

China

’s stock inventories.)

CTA strategies were adversely affected by these trend reversals in grains, including wheat and oats. Since wheat is fed to pigs, pork bellies rallied as well, which also hurt CTA fund performance.

“Wheat could be a good short opportunity, but it’s too early to call,” says Olivier Prock, chief executive and chief investment officer at Swiss alternative fund manager Salus Alpha, which runs a CTA product. “To profit from a retracement, we are looking to put a calendar spread on – which means we short nearby and go long deferred. Wheat has already retraced by $1.20 per bushel which is a good sign that the reaction could be overdone.

"However, the market is trying is still to identify the right level mode and is looking for more fundamental data," adds Prock. "The August Siberian harvest could be a surprise and a relief for the wheat situation. If the harvest is a disappointment, the situation might be around for a year or so, affecting other industries such as beer brewers.”

Separately, cocoa reached its highest price in 12 years after a London-based hedge fund, Armajaro, bought 7% of the world’s total annual supply. That fund is a coffee and cocoa specialist run by Anthony ‘Chocolate Finger’ Ward. Armajaro executed a similar trade in 2002, when it bought 5% of global cocoa production.

The latest purchase was 240,100 tons for a price of $1 billion, and, unusually, saw the fund take physical delivery. The cocoa now lies in refrigerated warehouses in Europe, where it can sit for the next 20 years, if need be.