Cattle, hog, hard wheat prices to gain from index rejig - sugar to lose


Lean hog and live cattle futures could see "material" upward pressure on prices from the annual commodity index  reweighting process, with Kansas wheat also a potential winner – but sugar a loser, Societe Generale said.

Funds following the two benchmark commodity indices, the S&P GSCI and Bcom, will from January 9-15 rejig their portfolios to account for price moves – meaning selling the better-performing commodities and buying the laggards – and adjustments in commodity weightings in the indices.

This process, by funds boasting $115bn of assets between them, will have the "largest impact" on Chicago-traded lean hog and live cattle futures, the Kansas City hard red winter wheat market and New York traded raw sugar, Societe Generale said.

For the livestock futures, the process looks most significant, implying purchases of more than 27,000 lots in both cattle and hogs – a particularly significant volume for the markets to swallow.

'Upward impact on prices'

In terms of open interest, that is the number of live contracts, the buying - equivalent to $590m in hogs and $1.13bn in live cattle – is equivalent to 16.5% and 15.1% respectively.

As compared with average daily trading volumes expected over the reweighting period, the buying is equivalent to 34% for hogs and 27% for live cattle.

"The impact on lean hogs and live cattle could be the most significant across the commodity complex, and the upward impact on prices could be material," SocGen analyst Mark Keenan said.

Such buying pressure would follow a difficult period for livestock markets, which have been weighed by recoveries in both US herds from declines fuelled by drought and high beef prices, in the case of cattle, and disease, in the case of hogs.

Chicago live cattle futures last month set a six-year low of 94.30 cents a pound, on a spot contract basis, although have recovered to close the last session at 104.075 cents a pound.

Lean hog futures last month hit a 14-year low of 40.70 cents a pound, before recovering to 47.00 cents a pound as of the last session.

'Price moves can be exaggerated'

SocGen added that the reweighting process looked likely to have a notable impact on prices of Kansas City wheat too, with buying expected at the equivalent to 14.0% of daily volumes during the reweighting period.

However, the biggest loser in the process looks set to be raw sugar, which faces selling equivalent to $740m, or 13.8% of daily volumes.

And the bank flagged the potential for exploiting fund reweighting deals which are "typically price insensitive with trading usually occurring at the closing/settlement price of the day.

"As such, price moves can be exaggerated during this period and can often provide trading opportunities," Mr Keenan said.

Price influences

However, exploiting the rebalancing will require significant preparation, with plenty of market positioning ahead of the process.

"The reweighting process can impact commodity prices through two main channels," he said.

 These are "the market impact form the actual buying and selling of the underlying commodity futures contracts "and the affect on "the behaviour or sentiment of market participants as they anticipate the potential impact the reweighting process might have on prices and/or curve structure".


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