Agricultural Product Inventories May Hit a Record High, Hedge Funds Flee in a Hurry

From cotton to wheat, from corn to soybeans, persistently high agricultural product supplies are flooding the market like a deluge, and hedge funds cannot flee fast enough.

Bloomberg News, citing a U.S. government report, said a global bumper harvest of agricultural products and slowing growth in market demand will push combined inventories of corn, soybeans and wheat to a record high. This prompted hedge funds to cut their net long positions in agricultural products for a fifth consecutive week.

As volatility in global financial markets increased, the Bloomberg Agricultural Products Index, which tracks the prices of eight agricultural products, has fallen 15% cumulatively this year, and its 60-day volatility touched its highest level since 2012 last week.

Paul Springmeyer, a senior securities portfolio manager in Bank of America's private client services unit, said: “We have seen the recent volatility in the agricultural products market. Most people are trying to reduce the risk in their portfolios, and one way is simply to stay away.”

CFTC data show that in the week of August 18, combined positions in options and futures for 11 agricultural products fell 21% to 183,929 lots. The cumulative decline over five weeks reached an astonishing 67%.

Supplies of agricultural products are pouring into the market without interruption. In France, grain supplies have become so large that even warehouse operators say they no longer have space to store grain. In South America, sharp currency depreciation has spurred local exporters to increase shipments abroad, such as sugar and coffee, in order to earn hard U.S. dollars. In North America, as Wall Street See mentioned, the U.S. Department of Agriculture unexpectedly raised its estimates for domestic soybean and corn output this month, and also said U.S. corn production for 2015-2016 will be the third-highest level in history. Corn, soybean and wheat inventories will rise for a third consecutive year.

At present, the factor most likely to change the outlook for agricultural product supplies is the El Nino phenomenon. But it is hard to say whether this climate phenomenon will be favorable or bullish for agricultural product prices. Australia's Bureau of Meteorology said last week that El Nino is strengthening. It may bring excessively abundant rainfall to major agricultural production areas in South America and may plunge parts of Asia and the Pacific land regions into drought.

According to NBC, Mike Halpert, deputy director of the Climate Prediction Center at the U.S. National Oceanic and Atmospheric Administration, said on August 13 that this year's El Nino weather phenomenon may be the strongest since historical records began in 1950. All computer models predict that a strong El Nino phenomenon will peak in late autumn or early winter this year.

Kelly Wiesbrock, a portfolio manager at Harvest Capital Strategies, said: “Commodity investors are currently under great pressure. Changes in market factors are not yet large enough to cause a major market correction.”

Lower agricultural product prices reflect the broadly weak trend in the commodity market. The Bloomberg Commodity Index has fallen 16% cumulatively this year, and more than half of the 22 commodities tracked by the index have already entered a bear market.