The author is a Reuters market analyst. The opinions expressed are his own. To get his real-time views on the markets, please enter the Global Ags Forum.
So-called "massive passive" investors may not hold such massive exposure to agriculture markets next year after poor returns across the commodities spectrum in 2014 sparked a wave of index investor redemptions ahead of the year-end.
In the week to Nov. 25, index investors slashed their collective long exposure to the main crop markets (corn, soybeans, soft red winter wheat and hard red winter wheat) by close to 96,000 contracts and its lowest level since January. In livestock (live cattle, lean hogs and feeder cattle) exposure was cut by nearly 14,000 lots and its lowest since mid-2009.
This bout of selling whittled down the index crowd's combined long exposure in agriculture markets to the smallest level since the first week of 2014, which in turn was the lowest collective total since mid-2009.
Should additional long liquidation be seen over the remainder of the year, the index crowd is likely to enter 2015 with the smallest ownership total in the agri arena since the height of the 2008-2009 financial crisis.
What's more, those investors will have little incentive to rebuild long positions amid a backdrop of replenishing global crop inventories and sluggish demand growth in most major markets - not to mention the broadly sour mood toward the commodities arena in general following the roughly 30 percent slump in energy prices since the summer.
Twice bitten, thrice shy?
While one year's poor performance in any area is usually not enough to spark a widespread shunning by investors the following year, the agriculture market's most widely tracked index - the S&P GSCI Agriculture Index - has now put in two losing years in a row, and so could be singled out for posing potentially elevated risk by investment managers in 2015.
No other commodities subset - including energy, base metals and precious metals - have put in back-to-back losing years since 2000, with the exception of the much more thinly traded softs arena. Indeed, the S&P GSCI agriculture arena has ended the year lower three times out of the past four years, which means that even though crop prices have recorded impressive sudden price rallies in recent years on the back of various production issues, the tendency for values to slump back again have dealt passive long-term investors a blow.
Looking toward 2015 investor allocations, there are reasons to expect index investors to take a more cautious approach toward agriculture market allocations than we have seen in recent years.
Firstly, global grain and oilseed inventories are projected to swell to record levels this year following record harvests of both corn and soybeans in the United States and projections for large production tallies out of South America in early 2015.
Secondly, demand growth in top import markets such as China is expected to remain slow for the near to medium term, potentially stifling consumer demand at the global level and further dissuading speculative buying interest.
And thirdly, following the recent historic drop in crude oil and projections for further poor energy market performance in the first half of 2015, investors are expected to take a cautious approach toward deploying funds into the commodities arena as a whole in 2015 in case subdued energy market action keeps a lid on commodities market performance in general.
Combined, these factors are likely to keep index investors from rushing into the agriculture arena in early 2015, which in turn may serve to contract participation levels and liquidity across the major crop and livestock markets going into the New Year.
Naturally, the case for commodities as a portfolio diversifier remains sound for many traders, so a core number of strategic investors can be counted on to re-enter the fray once 2015 allocations get underway.
But for many discretionary investors, two years of poor performance relative to the stock market may be enough to spark a cut back in commodity allocations, especially if the general mood regarding commodities investing continues to be set by the beleaguered crude oil and energy arenas.