Chicago, 14 March 2011

Many large speculators may be tempted to bail out of their long positions in the agricultural commodities arena after the recent heavy setback in crop prices brought to mind the price falls seen in the second half of 2008 when food commodity values endured a pronounced slump from multi-year highs that wiped out all the returns those investors had earned in the prior months.

However, agriculture commodity prices look set to be far more resilient in 2011 given the low level of crop inventories globally and the fact that the entire 2011 U.S. plantings and growing season still lies ahead, so a total divestiture of long crop exposure at this juncture may prove premature.

BIG MONEY ON THE TABLE

There's no doubt that the pan-commodity price advances seen in recent months have benefited traders with long positions in the agriculture arena. Every crop from corn to wheat has climbed to multiyear price highs, with many scoring records lately amid concerns over a shortage of global inventories.

Meat prices have also made aggressive gains over the same period. This strong price environment has spurred -- and to a certain extent has occasionally been fueled by -- large speculator positions in all these markets, especially among traders who manage funds for institutions and wealthy individuals seeking commodities market exposure.

Indeed, the combined long position of large speculators and index-style investors in these markets -- corn, wheat, soybeans, soymeal, soybean oil, hogs, cattle, sugar, coffee and cocoa -- recently hit its highest level ever of more than 3 million combined contracts.

From a notional value perspective, these positions have proven to be sound investments, with a combined long position featuring a single futures contract in each of the world's top edible crops (excluding rice) rising from roughly $15 million six months ago to close to $18 million at the beginning of March.

However, the recent price pullbacks seen across these markets -- spurred in part by a reallocation out of agricultural markets and into energy commodities as turmoil gripped major oil exporter Libya -- has dented the valuation of a large long-only crop position, and may remind traders sitting on hefty positions of the latter months of 2008 when crop prices collapsed to decimate the balance sheets of traders holding large long agriculture market exposure.

With traders mindful of both the extent of crop market gains in recent months as well as the steepness of the 2008 pullback, the recent price turbulence may spur large traders to pare back long positions in these markets for fear of a repeat of the 2008 tumble when several large traders watched unrealized profits disappear in a matter of weeks.

KEY DIFFERENCES THIS TIME AROUND

The recent price falls across the top crops were the first major price reversals seen in these markets for several weeks, and hinted that the period of one-way (higher) traffic was over.

However, while a more volatile price environment has emerged, and indeed may mark the end of the great 2010/11 bull market that began last fall, it does not likely mark the beginning of a crop price collapse on the scale seen in 2008 for several key reasons.

Firstly, the great bailout from the agriculture markets in 2008 came after the U.S. corn and soybean crops had begun their critical pollination phases amid largely unthreatening conditions. As we have still to plant a single seed of any crop for the 2011 growing season, it would be vastly premature to consider this year's crop season to be a similar success.

Secondly, the 2008 commodity market exodus was as much driven by an unraveling credit market as by a souring in commodity market appeal, as many traders were forced to drastically scale back market exposure amid the global financial market meltdown which impacted all financial and trading firms.

Thirdly, inventories of the World's top food crops were in the midst of a rising trend from 2007 through 2009 that served to undermine long-sided crop positions in the fall of 2008. In contrast, food crop stocks are on a downward heading in 2011 that should serve to underpin crop values over the coming growing seasons, especially during any periods of crop stress.

In all, holders of very large long positions across food commodities may have felt a little uneasy amid the recent price turbulence, and perhaps have begun to think about whittling back that exposure for fear of an aggressive price collapse akin to the 2008 tumble.

But with the entire U.S. growing season still to come, and with world food stocks on the decline, fresh rounds of price strength should be seen in all key crop markets that should reward investors who retain their long exposure to food commodities over the coming months.

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