COMMODITY PRICES TANK AS HEDGE FUNDS EXIT

Prices for grains, metals, and other commodities, many of which soared to record heights during the post-COVID recovery, are tanking now that hedge funds are selling their holdings, The Wall Street Journal reported.

The price plunge has been particularly dramatic in corn, soy, and wheat, which now are cheaper than supply and demand warrant, some analysts told the WSJ.

Grain prices have fallen back to their levels a year ago, which were abnormally high because of poor harvests around the world but had not yet been spiked by Russia’s attack on Ukraine and resulting Western sanctions.

Speculators who rode the rising prices and, in doing so, helped push them higher have now largely closed out positions that were intended to capitalize on inflation.

Those speculators are storing their money in safer havens to wait out a slowing world economy and possible recession, the WSJ said.

“Hedge funds are always the price driver in ag markets,” David Whitcomb, CEO of Peak Trading Research, told the WSJ. 

“We see the highest correlation with what they’re doing and what price is doing,” he said. “When hedge funds sell, prices go down.

The reason: futures trades among farmers and food producers tend to balance each other.

In contrast, hedge funds bet on price moves. When more and more of them make the same bets, prices that normally are balanced between supply and demand become skewed.

Commodities’ price tumble is “de-linked from physical fundamentals and driven by financial liquidation,” Goldman Sachs analysts wrote in a research note last week.

The dramatic sell-off “is masking profound dislocations in global agricultural trade flows and in no way alleviates the risks of physical supply shortages through 2023,” JPMorgan’s researchers warned.

Speculators’ mass exodus has pushed prices below production costs in some markets, leaving a 20- to 30-percent upside in grain prices due to ongoing shortages, prospects for poor harvests in several parts of the world, and the Ukraine war, they said.

“Corn, soy, and spring wheat conditions have declined near-continuously for the past six weeks,” Goldman’s analysts wrote in a 3 August report.

If the U.S. corn and soy harvests decline by 2 to 3 percent, supplies could fall to record lows relative to demand, they added.

TREND FORECAST: With wheat already scarce and future supplies threatened by droughts and heat, more countries and food processors are turning to corn and rice, which are in greater supply around the world and, therefore, less expensive than wheat.

However, droughts and extreme weather will continue to batter commodity crops of all kinds, keeping prices high and forcing the agriculture industry to innovate to protect harvests and farmers’ ability to survive financially.

Considering the current wild card such as weather patterns, plus the ongoing Ukraine War and social unrest increasing across the globe, the trend line for many food related commodity prices will keep rising.