Speculators Exit Agricultural Markets, Intensifying Crop Selloff

Benchmark futures prices for corn have dropped 25% over the past three months.

An exodus of hedge funds and other speculators from commodities markets has exacerbated the fall in prices for wheat, corn, soybeans and other staples, which some analysts say are now cheaper than supply and demand warrant.

It is a sharp reversal from earlier this year when money managers, worried about inflation and war-related supply problems, helped run up commodity prices by piling into futures markets with bets that prices would rise. Wheat and soybeans notched price records earlier this year and corn climbed close to its all-time high, but since then speculators have exited from agricultural markets, taking profits, closing out inflation trades and battening down for recession.

Crop prices have tumbled to about where they were a year ago, which was historically high due to poor harvests but before markets were inflamed by Russia’s invasion of Ukraine.

Speculative support has come out of the broader market for raw materials from crude oil to copper, contributing to price declines that have raised hopes among investors that inflation has peaked. But in agricultural commodities, which factor into prices for fuel, food and clothing, the rush of traders in and out has been especially pronounced and impactful.

“Hedge funds are always the price driver in ag markets,” said Dave Whitcomb, who runs Peak Trading Research. “We see the highest correlation with what they are doing and what price is doing. When hedge funds sell, prices go down.”

The reason is that futures trades among those involved in the production, trade and consumption of actual crops, such as farmers and food makers, tend to balance out. Speculators aim to profit on price moves rather than manage risk. When a lot of them start making the same bets, they can tip the market out of balance and amplify price moves.

Rising agricultural prices became a popular bet on Wall Street in autumn of 2020. Demand from economies emerging from lockdown was climbing. Food importers were eager to restock. Crops were poor. Hedge funds and other speculators piled in.