Funds have been piling back into grains and agricultural commodities in general since June, a move that coincided with the start of an El Niño event and expectations for a historically intense version of the weather phenomenon.
The S&P GSCI Agriculture Index last week broke out to a three-week high. At the same time, Commitments of Traders data released on Friday showed that large speculators – typically hedge funds – bought 276,000 grain and soft commodity contracts in the weekly period ending Aug. 18, putting their combined net long position at 756,000 contracts, a nearly 3 ½-year high, according to Ole Hansen, head of commodity strategy at Saxo Bank.
Since late June, the combined managed-money position across six grain and soybean contracts and four soft commodities has swung from a 188,000-contract net short to a 756,000-contract net long, almost matching the 3 1⁄2-year high of 774,000 contracts reached in early May, he noted. Among grain futures, hedge funds bought 83,700 corn contracts and 50,300 soybean contracts. The corn buying was particularly broad, Hansen notes, with long positions up by 42,700 and shorts cut by 41,000 contracts, pushing the net long position up to 250,500 contracts.
Producers and traders don’t need long memories to recall what happened after funds built up historically strong long positions after the start of the U.S. war with Iran this spring. Massive liquidation drove sharp downdrafts across the grain and soy complex – a reminder how fickle money flows can be.
Bulls, however, may find some encouragement in how the S&P GSCI Agriculture Index, which tracks futures markets in corn, soybeans, soft red and hard red winter wheat, sugar, coffee, cotton and cocoa, has tended to perform during past El Niño events.
The current El Niño event is rapidly intensifying across the central-eastern equatorial Pacific, with ocean-atmosphere forecasts indicating it could become one of the strongest on record. Following its official emergence in early summer, sea-surface temperature anomalies in key Pacific tracking zones have escalated quickly, with forecasters projecting a high probability—over 80% to 90%—that conditions will reach “very strong” or historic intensity levels heading into late fall and winter.
Dean Christians, founder of Turning Point Market Research, observed in a weekend note that during past El Nino episodes going back to 1902, the index has advanced 66% of the time (see chart above). And he notes that the 15.6% gain seen during the current El Nino through Friday’s close was tracking well ahead of the historical tendency (see table below).
While three-year highs for the S&P GSCI Agriculture Index are not inherently significant, “this breakout deserves a closer look because it is occurring alongside a rapidly strengthening El Niño,” Christians writes.
Earlier: The tailwind graings have been waiting for? These rare signals just flashed green.