Agrimoney.com has reported that net long positions on key agricultural futures across the hedge fund industry have declined significantly in the past two to three months, down from roughly 600,000 contracts to 367,000 contracts in play. Hedge funds across the country have repeatedly sold off stakes in corn, wheat, and cotton in particular during this time period. A number of factors may be contributing to this sudden shift in approach, including an important move from a leading commodity speculator, questions about the Federal Reserve's possible interest rate change in the months to come, and environmental and seasonal factors in the agricultural industry that have affected supply and demand.
Large Inventories, Low Prices, and Sell-Offs
Wheat, one of the nation's largest agricultural commodities, is currently selling at a price that is as low as it has been in about a decade. Part of the reason for the shift in price is a glut of wheat inventory across the country, which has led to the price falling to well under $4 for current agricultural contracts. Though the price for future contracts climbs back up somewhat, leading to about $5 for early 2018 contracts, it nonetheless does not seem to be enough to sway hedge funds from selling off long positions in the commodity.
With more wheat on the market, other commodity prices have changed too. Cheaper wheat means that farmers are more likely to purchase that commodity as a grain for feeding livestock than they are to purchase corn. As the resulting demand for corn drops, so too do the prices in the corn market. These and other commodities tend to be closely linked in this way.
Following Expert Guidance and Remaining Cautious About the Fed
Hedge funds trading in commodities futures look to industry leaders for key speculation, and those leaders tend to have cut long positions in large quantities in recent weeks. Funds following suit in large groups can further impact the market.
Many fund managers are likely paying attention to predictions that the Federal Reserve is likely to bolster the interest rate, an event that some industry experts have estimated could happen soon. If this does take place, and the dollar is strengthened as a result, it is probable that foreign exporters will benefit. On the other hand, it is also possible that a rise in interest rates across the United States could result in a long-term boost to prices of agricultural commodities instead. One school of thought holds that commodities perform well during interest rate hike periods. If this is the case, some investors concerned about the possibility of the Fed shifting rates may decide that the best move is to buy up commodities, rather than to sell them.