Growing levels of investor bets on corn, soybean and wheat derivatives, despite price weakness, reflects mounting interest in the market of algorithmic funds – which have overturned the dominance of swap traders.
Ann Berg, a former director of the Chicago Board of Trade, said there was potential for trading volumes in corn and wheat, which set or approached record levels last year, “to match or exceed those levels” this year, although falling by about 15% for soybeans.
Interest in options had been particularly strong, rising by some 30% for corn and 16% for whaet, agrowth which “probably reflects the rising electronic trade in these markets, which have been slow to migrate away from the ‘open outcry’ mode of trading,” Ms Berg said.
Furthermore, open interest, the number of live contracts, in derivatives in the big three Chicago contracts has risen too.
As of the end of last month, open interest in Chicago corn futures and options was up 11.8% year on year, in soybeans up 5.7%, and in wheat up 16.9%, analysis of Commodity Futures Trading Commission data shows.
‘Defied conventional wisdom’
The increasing appeal of the contracts has “defied the conventional wisdom that low prices deter trading interest”, Ms Berg said.
December corn and wheat contracts remain near contract lows in Chicago, with soybean futures among their lower levels of the past five years.
However, “trading has been increasingly generated by algorithmic programmes, which often seek small anomalies across several markets and increasingly operate without human supervision”.
Such funds – decried by some observers for trading without thought of food price fundamentals, but supported by other for the liquidity they provide, allowing other investors to trade more easily – could account for some 50% of volumes, according to CME Group, which runs the Chicago exchange.
By contrast, she flagged the waning influence of swaps dealers, managing passive funds based on the performance of futures prices, and which have “gradually lessened their presence in the market” as prices have declined.
Swaps dealers attracted notable focus early in the decade – amid ideas their investment methods were fuelling crop price buoyancy, and so raising food bills – with interest in their “outsized net long open interest in corn and soybeans, over 30%, and wheat, over 40”,
However, “most recently, swaps dealers have reduced their positions to the mid-teens or below as a percentage of open interest in all three commodities” as prices have fallen at or close to all-time lows, depending on which index is followed.
The decline tallies too with a declining interest by banks, leading swap operatives, in agricultural commodities, with the field now represented largely by ag trading houses such as Cargill.
‘Tight cash flows’
The comments came in a paper for the United Nations Food and Agriculture Organization’s Food Outlook briefing, in which Ms Berg signalled the prospect that grain prices may at least not fall further.
“Record exports from the US for 2016-17 may indicate that prices at these low levels have found their equilibrium values, at least until planting season commences again in spring 2018.”
She also said that the steep carries in corn and wheat futures – that is, the discount at which near-term contracts sit to distant ones – may be a sign of weakened financial resilience among farmer, who are forced to sell even at weak prices.
“These wide [futures] curves, besides reflecting ample inventories may also reflect three consecutive years of declining farm income,” Ms Berg said.
“Very low basis levels in the domestic market indicate that producers have been willing sellers of wheat and corn despite low prices, possibly indicative of tight cash flows.”