The current exodus from commodities seems to be tied to the re-pricing of risk that is going on in the credit markets, as lenders and futures exchanges are demanding higher security deposits from highly leveraged hedge funds. This in turn has forced a number of these hedge funds to raise cash by liquidating some of their assets, such as commodities, which unlike many credit instruments remain very liquid.
Hedge funds have been a strong force behind the commodity boom and if they stop buying and instead take some chips off the table, there is really nobody else to take their place in bidding for some of these overpriced commodities such as wheat or soybeans. This can result in a big void underneath the market, because commercial buyers are not willing to pay 12 dollars for wheat or nearly 16 dollars for soybeans.
However, we believe that it is important to differentiate between cotton and some of these other Ag commodities, because cotton is not nearly as overpriced. Wheat is still up about 300% from where is was a couple of years ago, while soybeans are roughly 250% ahead and corn is about 150% higher.
Cotton in comparison is up by just about 40% since breaking away from a multi-year trading range near 50 cents. If we further factor in that the dollar index has lost about 20% over the last two years, cotton is barely ahead at all.
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.jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "UBM China (Shanghai)")
-Ltd..jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "Thermore (Far East) Ltd.")
