Hogs to gain less from fund rejig - but coffee, wheat hopes rise

The revival in lean hog futures has quelled somewhat the further boost to prices ahead posed by an annual rejig of index funds holding $115bn in ags – although for Chicago wheat, support now looks set to be more marked.

Societe Generale - which a month ago named Chicago lean hog futures as the commodity most likely to gain in price from January's index fund reweighting process – flagged the changes in prices since across the complex which have changed likely scenarios.

"Several factors including the outcome of the US presidential election and the recent Opec meeting have caused significant moves across many commodities," the bank said.

In fact, while expectations that Opec will agreed to extend production cuts have sent Brent crude prices soaring back above $50 a barrel to 16-month highs, the impact on altering expectations for the fund reweighting is fairly minimal.

For index funds to adjust their portfolio weightings in Brent crude to the revised proportions issued by the Bcom and S&P GCSI indices – a process which occurs over for one week every year, in 2017 from January 9-13 – would equate to some 2.4% of average daily volumes in the contract, a small change from the 2.0% estimated a month ago.

Less buying needed

However, for lean hogs, a revival in Chicago futures of 25% from a 14-year low reached in October means that much of the price adjustment needed for the contract to account for the correct proportion of the value of index funds' portfolios has already occurred.

Index funds will still need to buy some $406m in lean hog futures, equivalent to 21% of daily volumes over the average week for the contract.

But that is well below the purchases of $590m, equivalent to 34% of daily volumes estimated a month ago.

Nonetheless, such percentages "are still very significant and will likely have a material impact on prices, curve structure and sentiment ahead of, and also during the rebalancing period.

"The price impact on live cattle, lean hogs and zinc prices could be the most significant across the commodity complex."

'Pretty good demand'

Lean hog futures have been revived by factors including surprisingly firm US pork prices, running marginally above those a year ago, despite production which has over the past month run 3.3% higher.

"Lower prices for pork earlier in the fall appear to have 'bought' some pretty good demand going into the holiday season," said Paragon Economics and Steiner Consulting.

"Robust export volumes also have helped clean up the market, with particularly strong exports to Mexico despite a steady erosion in the value of the peso."

The global market has been supported by strong values in China, the top pork producing, importing and consuming country, where hog prices last week, at the equivalent of $2.31 a kilogramme, mean "producers are still able to make an impressive $100 a market hog", according to Genesus.

"After all, almost 5% of China's breeding stock was culled in 2015, and it takes time to get back to a supply demand equilibrium."

'Extremely strong demand'

Chicago-traded live cattle now looks like being the contract most affected by the 2017 rebalancing process, with $1.09bn of buying required, equivalent to 22% of daily volumes, to ensure the lot has the correct weight in index fund portfolios.

That figure, though, is down from the 27% estimated a month ago, with live cattle futures having themselves also rebounded from multi-year lows, helped by strong US exports.

"Extremely strong demand from a number of Asian markets continues to drive exports of US beef this fall," Paragon Economics and Steiner Consulting said.

"And it is quite impressive that the robust export pace so far has not been impacted much by the strong dollar," which makes US exports more expensive.

Wheat, coffee changes

By contrast, Chicago wheat looks more exposed to the reweighting process, thanks to recent price falls, meaning that index funds need to buy $600m of the grain to give it the right value in their portfolios.

That sum, equivalent to 8.9% of average daily trading volumes, is up nearly $100m on the estimate a month ago.

Meanwhile, for New York-traded arabica coffee, which has fallen sharply in value since mid-November, index funds now need to be a small buyer in futures, of $101m, rather than the seller of $143m estimated a month ago.