Fund investors are bailing on commodities, and meanwhile the war in Ukraine suggests they should be doing the opposite.
The combination of sustained commodities fund outflows along with a pending disruption to global grain supplies suggest a possible epic rally for the sector.
Bearish Commodity Fund Outflows
New data from the Washington D.C.-based Investment Company Institute shows redemptions from mutual funds and exchange-traded funds specializing in commodities in each of the five weeks through July 19, which is the latest data available.
The flows were relatively small compared to stocks or bonds, but the commodities markets tend to be much thinner and generally overlooked by many fund investors.
However, the outflows were significant totaling $2.9 billion over the five week period. The weekly outflows ranged between $800 million and $256 million.
While some major agricultural products has staged rallies over the last few weeks their prices are still down versus 10 months ago. For instance, wheat recently fetched $7.17 a bushel down from $9.38 in early October, according to data from Trading Economics. Corn is down also, recently trading at $5.36 a bushel versus nearly $7 last November, data show.
When you have consistent and meaningful outflows amid falling prices it’s often a sign of pessimism for the sector. However, extreme pessimism is usually a sign that the market could move in upwards in short order.
More War Problems for Food
Yet the actual fundamentals in the commodities have a solid outlook, experts say.
The recent rallies in the agricultural come on the back of extreme weather in the U.S. and other parts of the, plus a resurgence of geopolitical tensions most notable those stemming from the Russia-Ukraine conflict.
Shawn Hackett, who writes the The Hackett Agricultural Smart Money Insiders newsletter, explains in a recent report hat weather may now be taking a backseat to conflict, as follows.
- “For the moment, US and global weather is taking a back seat to the escalating Geopolitical threats going on with Russia/Ukraine and what that may mean for grain prices.”
First, Russian attacks on Danube river ports and Ag infrastructure are a worry, Hackett explains. “If the Danube river flow of Ukraine grain breaks down than “Katie bar the door” for grain prices to the upside,” he writes.
“Additionally, the EU has been pushing back on land based movement of Ukraine grain to protect their own grain interests,” Hackett continues. “This will slow down, in the least, land based movement of Ukraine grain.”
Put another way, grain flows onto the world market, which is where the prices are determined, look set to get disrupted likely sending prices for futures contracts up by the daily limit, day after day after day.
Hackett says the last time grain prices shot up world hunger was avoided because India kept exporting rice. But don’t expect a repeat, he writes as follows.
- “That is not going to happen this time which makes the current situation far more grave and explosive to the worlds consumable food supply for half the worlds population. This is how global wars have typically been triggered throughout history. Take away the food and the people come looking for who is to blame.”
In other words, get ready to brace yours self for some epic food price movements.
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