Agriculture commodity-related exchange traded funds have given up most of their gains this year as speculators cut their bets on soft commodities, but some market observers argued that the low prices no longer reflect the fundamentals.
The Invesco DB Agriculture Fund (DBA), which includes a combination of futures within several areas of agriculture and is the largest agriculture-related ETF by assets, has declined 8.9% over the past three months and is now up 1.0% year-to-date.
Soft commodity prices, notably plays like corn, wheat, and soybeans, surged earlier in 2022 after Russia’s invasion of Ukraine and western sanctions on Moscow disrupted the normal flow of the two key agriculture commodities out of the region. Consequently, prices of wheat and soybeans surged to record highs this year while corn prices flirted with all-time highs as well.
However, this inflation trade quickly wound down as speculators and traders exited their positions in face of heightened recession risks as the Federal Reserve executed aggressive interest rate hikes to combat four-decade high inflation levels without regard to how the economy would respond. Additionally, the tightening monetary policy has also supported a stronger U.S. dollar, which further weighed on USD-denominated commodities.
“Hedge funds are always the price driver in ag markets,” Dave Whitcomb, who runs Peak Trading Research, told the Wall Street Journal. “We see the highest correlation with what they are doing and what price is doing. When hedge funds sell, prices go down.”
Following this sudden reversal, agriculture commodity prices are back to around where they were a year ago when the markets reflected a dearth in supply due to poor harvests in response to unfavorable weather conditions.
According to Peak Trading data, hedge funds and other speculator positions on agriculture futures have almost entirely receded to mid-2020 levels. Since the Federal Reserve embarked on its aggressive monetary policy stance, corn and wheat futures prices have plunged 25% and 27%, respectively, in the past three months while soybean futures declined 16%.
However, some market observers argue that these markets may now be undervalued after the sudden price collapse. Goldman Sachs analysts believed the selling has been “de-linked from physical fundamentals and driven by financial liquidation.”
JPMorgan analysts also contend that the drop “is masking profound dislocations in global agricultural trade flows and in no way alleviates the risks of physical supply shortages through 2023.”
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