Giant traders’ interest in essential commodities may send prices soaring

NEW DELHI: Giant index funds and swap dealers are looming so large over the international markets for food, beverages and fibre that the US government has begun disclosing their trading positions separately to other market players every week.

This move confirms the worrying impact of their asset reallocation strategies on the global prices of sensitive commodities like wheat, corn, cotton and sugar in the past one year. Last week, the share of index traders in total open interest ranged from a huge 39% in wheat on CBoT to 28% in sugar on NYBoT.

Commodities have risen sharply in popularity last year. Index funds are investing in indexes such as the Dow Jones-AIG and Reuters/Jefferies CRB. Pension funds, endowments and other institutional players are also investing in commodities in a big way to diversify their assets.

A lot of investment banks are also buying futures to carry out physical commodity trades for their clients. Last week, these index fund traders were net long on Nybot coffee, sugar, cotton, and cocoa.

Acknowledging the importance of this new trading reality, the Commodity Futures Trading Commission (CFTC), the US exchange regulator, believes that today a significant proportion of the long-side open interest in a number of major physical commodity futures contracts is held by so-called non-traditional hedgers such as swap dealers. On the other hand, traditional hedgers may be either net long or net short (more often, the latter).

“This has raised questions as to whether the Commitment of Traders report can reliably be used to assess overall futures activity by persons who are directly involved in the underlying physical commodity markets,” it has said in a release. The COT weekly trade data reports usually come handy for farm marketing companies, advisors/brokers; commercial hedging advisors/brokers; end-users, exporters, processors, and merchants. The new disclosure norms will only be applicable on agri-commodity futures, as they are more sensitive. Metals and bullion will be out of its purview.

The new trade report will show a new category of ‘index traders’. This will include positions of managed funds, pension funds and other institutional investors that generally seek exposure to commodity prices as an asset class in an unleveraged and passively-managed manner using a standardised commodity index.

It will also include positions of entities whose trading predominantly reflects hedging of over-the-counter (OTC) transactions, involving commodity indices — for example, swap dealers holding long futures positions to hedge short OTC commodity index exposure opposite institutional traders such as pension funds.

The 12 commodities covered by the new report, and the respective exchanges on which they are traded, are: corn, soybeans, wheat, and soyabean oil on the Chicago Board of Trade; wheat on the Kansas City Board of Trade; cotton no. 2, coffee C, sugar no. 11, and cocoa on the New York Board of Trade; and live cattle, lean hogs, and feeder cattle on the Chicago Mercantile Exchange.