(Agrimoney) – Thursday is a big day for commodity markets, as it sees the start in earnest of the scheduled index fund rebalancing process, implying unusual and large trading pressures.
The process sees index funds reweight their portfolios back to the levels suggested by the index followed, meaning selling the best performers of the previous year and buying the laggards.
Arabica coffee should be the agricultural commodity most affected, with selling of some $1.2bn over the five-day reweighting process for the key S&P GSCI and BCOM indices, according to Societe Generale.
Still, there are funds following other indices too to take into account, besides the fact that volatile prices present a somewhat moving target in terms of rebalancing calculations.
Wheat estimates
In grain markets, the expectation is of some selling in wheat, albeit with forecast varying as to how much.
SocGen has put the figure at about 14,000 contracts for Chicago soft red winter wheat and 4,000 for Kansas City-traded hard red winter wheat, while Brian Henry at Benson Quinn Commodities said that the “much-hyped” rebalancing process meant that 10,000 contracts of wheat expected to be sold over the next five sessions”.
Mr Henry added: “These aren’t numbers that will make a huge impact, but could have played a role in the late weakness” in the last session.
At Chicago-based Futures International, Terry Reilly flagged talk that “two large hedge funds will start reducing long positions as a part of rebalancing, starting on Thursday.
“Comments tossed out 9,000-12,000 contracts of Chicago wheat and 3,000-4,000 contracts of Kansas City wheat.”
Soybeans vs corn
As for other Chicago contracts, “index funds are expected to buy soybeans and sell corn on their rebalance this month”, another broker noted.
Mr Reilly said: “Chatter was that two major index funds will sell an estimated 25,000 long corn contracts starting on Thursday.”
That is in line with the SocGen estimate for funds following the S&P GSCI and BCOM indices, while the bank has forecast soybean buying of about 5,000 lots.
Not so fast…
However, it is not so simple as just to stand back and expect, for example, a plunge in arabica coffee futures over the next few sessions.
Other investors will, for example, have positioned to exploit the reweighting, perhaps selling coffee in advance in expectation of buying back at a profit – assuming arabica prices do indeed drop.
(Was this selling in anticipation behind the drop in arabica futures last month to levels Commerzbank termed “exaggerated”?)
Furthermore, there is talk that some index funds have already been active in reweighting portfolios, and that deals typically happen late in the session.
Price moves
Whatever, the correlation between forecasts for index fund positioning and the performance of crop futures as of 09:45 UK time (03:45 Chicago time) was reasonable but not watertight.
Wheat was lower, by 0.6% to $5.76 ¼ a bushel in Chicago for March delivery, while soybeans gained, by 0.1% to $10.57 ¾ a bushel for March.
Cotton, for which rebalancing is expected to see buying of some 5,000 lots on SocGen calculations was higher too, up 0.3% at 60.60 cents a pound in Hew York for March.
However, Chicago corn was higher too, adding 0.3% to $3.97 ½ a bushel for March.
‘Significant crop loss’
Of course, there are a plethora of other influences to factor in too, such as the weather threats (or not) in Brazil and Argentina.
“There are conflicting reports about whether or not South America will suffer significant crop loss,” CHS Hedging said.
Another broker said: “Some have also tried to make a weather story out of the dryness in Northeast Brazil.
“This is a very small area that will have significant crop stress. The majority of Brazil has had adequate subsoil moisture levels and there is a potential to see a record yield.”
‘The big negative’
Then there is the idea of the winterkill threat for US winter wheat.
“The cold temperatures could impact some soft red winter wheat fields amid winterkill across Missouri, the lower half of Illinois, southern Indiana, and parts of Ohio, but the areas are small and those producing states are a small contributor to the larger picture,” Futures International’s Terry Reilly said.
CHS Hedging said: “Funds appeared to turn sellers with updated forecasts showing a very small area of the winter wheat subject to damage from this week’s deep freeze.
“There are a lot of stories swirling around in the wheat market that could support the wheat market, but the big negative for wheat seems to be that there is plenty of wheat in the world, and the dollar is trading near its 2005 high.”
A strong dollar reduces the competitiveness of dollar-denominated exports.
Data later
And this theme will come into focus later in the day when Egypt’s Gasc authority unveils the results of its latest tender, while the US Department of Agriculture will unveil US crop export sales figures for last week.
The figure is expected at 200,000-400,000 tonnes, compared with 354,130 tonnes last time.
For corn, US export sales are expected at 600,000-800,000 tonnes, down from 895,059 tonnes last time.
For soybeans the figure is seen at 500,000-700,000 tonnes, in line with the 611,019 tonnes the previous week.
Palm gains again
Meanwhile, oilseeds are also continued to feel some support from soaring palm oil prices, which are being sent soaring by fears for the impact of flooding on output in Malaysia, the second largest producer and exporter of the vegetable oil.
Palm oil for March stood 1.9% higher at 2,374 ringgit a tonne in Kuala Lumpur, with the March contract rising back over its 200-day moving average for the first time in seven months.
Earlier, the lot hit 2,379 ringgit a tonne, the highest price for a benchmark contract since July, and up 5.0% so far in 2015.
The extent of the damage to Malaysian output will be laid bare in Malaysian Palm Oil Board monthly data on Monday.
