It was near the start of the 21st century that the reality of this transformation struck. Investment funds began selecting wheat and other agricultural commodities, plus a wide range of energy and metals, as profitable places. The initial marketing focus was that commodity ownership is an effective tool for investors seeking protection against inflation on grounds that commodities would outrun other prices. This theory quickly shifted into favoring purchases made in the same way positions are taken in equity and fixed income securities. Involvement of long-short hedge funds in this arena saw the influence of this new role for wheat and other grain markets change from initial focus on outright ownership to taking both sides. It felt very much like markets that once were largely influenced by demand-supply factors were now subject to vast forces beyond the experience of industry participants. Open commitments held by “investors” overwhelmed other positions.
According to a leading international bank, institutions and individuals from 2004 into early this year made investments totaling $440 billion in acquiring index funds and exchange-traded funds that are designed to track commodity price moves. By comparison, in that same period, net outlays to acquire U.S. stock funds totaled $25 billion. Beginning this year, the record-setting pace of commodity-related funds reversed, falling as investors fled from commodities. The main cause for writing the demise of the “supercycle” is slowing of the Chinese economy and the reality that China will not provide a perpetually growing market for either grains or base metals or energy. Yes, that change came just as China contracted to import more wheat than in many years, but that did not spur any revision of the view that China should not be counted on to buy increasing quantities of a wide range of commodities.
Although connections are not often made, it is likely that the surge in commodity trading stimulated international banks to seek a role in commodities reaching beyond financing and selling funds. As the result of new laws enacted by Congress more than a decade ago and a 2003 ruling by the Federal Reserve, leading international banks entered into ownership and operation of commodity-related assets like warehouses, ships and pipelines. Described as complementary activities related to regular banking and also cited as an essential part of banking’s history, these moves have not included significant positions in agriculturally-related commodities. No major grain storage elevators are owned by banks, which have long considered well-run elevators as important holders of assets against which huge amounts of capital are borrowed. Yes, there are instances of banks playing roles different from the usual even in grain-based foods.
Banking’s ties to commodity markets, especially grain-based foods, comprise a relationship that has existed for hundreds of years. What has happened in the past decade is different from that past, and whether the pending return to normalcy should be welcomed or not is something that only time will answer. One certainty is that markets, while relieved of some unusual pressures, will continue to demand extraordinary skills and close attention.
