“Our discretionary managers… are long wheat because in an absolute sense it’s been extremely beaten up.”
– ALEX ALLEN, EDDINGTON CAPITAL MANAGEMENT
Wheat has been the poor cousin of commodities this year, losing value as star performers such as copper, lead and sugar have flown, but the humble grain is now beginning to catch the eye of all-important investment funds.
Prices have been weighed down by growing stocks following a record global harvest in 2008 and the second-largest harvest in history this year, but there are signs that the tide may finally be beginning to turn.
The International Grains Council and the United Nations Food and Agriculture Organization expect lower prices to reduce plantings for the 2010 harvest and investors with access to cheap money are eyeing wheat as they look to catch the next wave of the commodities rally.
“There has been a pickup in interest in wheat recently,” said Nicholas Brooks, head of research and investment strategy for ETF Securities.
“Perhaps the negativity (on fundamentals) has been overdone… investors do tend to look for laggards, especially when you are in a period of very strong price increases in commodities generally,” he added.
Brooks said inflows into ETFS wheat, a product which tracks wheat futures trends, have more than doubled since May to a cumulative total of $140 million, exceeding any other agricultural product based on a single commodity (all figures US$).
The reweighting of commodity indices could also boost wheat as index funds buy around the turn of the year to bring its value back up to target levels.
The decline in prices means at the beginning of November its weighting in the Dow Jones-UBS commodity index was just 3.16 per cent compared with a target for the start of 2010 of 4.70 per cent, VM Group said in a report earlier in November.
CBOT wheat prices on the
benchmark front month were trading around $5.57 a bushel on Nov. 17, up by more than 30 per cent from 2-1/2-year lows set two months earlier, although they remain nearly 10 per cent below their end-2008 level.
Fund managers, looking at the relative performance of wheat compared with some other basic resources, have already lengthened exposure.
“Our discretionary managers – the ones who don’t follow systematic models – they are long wheat because in an absolute sense it’s been extremely beaten up,” said Alex Allen, chief investment officer at fund of hedge funds firm Eddington Capital Management.
“On a relative basis, compared with some of the other agricultural commodities, it’s looking cheap as well,” he said.
Wheat bulls cite lower plantings, particularly in the U. S.
Others were less excited on the prospect for prices, suggesting high stocks would limit the scope of any advance. “We would expect global wheat plantings to be lower next year but not hugely so. I think overall we are maybe only talking about one or two per cent down for the 2010 harvest,” said IGC senior economist Amy Reynolds.
“Given there is something like a 20-million (tonne) rise in global stocks this year, that is probably sufficient to keep supplies broadly similar,” she said.
Goldman Sachs analyst Jeffrey Currie noted more differentiation across commodity markets than a year or two ago when there was a broad-based rally.
“In the ags space, soybeans and corn are bullish, wheat is bearish,” Currie said.
“I’m not a believer of there being a catch-up argument here in any shape or form. It is an oversupplied market, with wheat it grows really easily, they don’t even use GMO (genetically modified organisms) because the demand doesn’t grow fast enough.”
Analyst Joe Victor of Illinoisbased research and advisory firm Allendale Inc. said wheat prices were likely to be tied to movements in corn and soybean futures for the next few months, which should leave scope for gains.
Funds have also been building a long position in CBOT corn.
“The higher corn that we see, the higher fund positions that we see, definitely we are seeing that spill into the wheat,” Victor said.
– Additional reporting for Reuters by Mark Weinraub in Chicago