July 29, 2015

Institutional funds are flocking to agricultural commodities for the first time in years amid El Nino weather conditions that are creating a favorable supply/demand scenario for investors, reports indicate. Chinese funds in particular are reportedly among those who may lift their exposure to agricultural commodities in the coming months.

Potential drought conditions throughout key production regions for sugar crops in particular, such as India and Thailand, may cause crop damage that coupled with weak agricultural commodity prices and rising demand has been a catalyst for capital inflows into agricultural exchange traded funds (ETFs). Last year there were capital outflows of approximately 20 percent.

Investors poured a combined $800 million into agricultural indices and ETFs in April and May versus withdrawals of $2.4 billion at year-end 2014, according to Barclays data cited in Reuters. Analysts are predicting net capital inflows into these funds for all of 2015 despite improving conditions for wheat and soybean crops of late.

“If you do look longer-term into demand trends, you’re likely to see pretty solid growth year-on-year. Especially now that we are beginning to see the volatility in weather conditions starting to impact the market’s ability to supply the rise in demand,” according to ETF Securities Director of Commodity Strategy Martin Arnold in Reuters.

Till now agricultural commodities have been under pressure amid a supply glut and weak prices, particularly for corn and sugar. Now that demand is strengthening, market participants are expecting a supply deficit for sugar for the first time in more than half a decade.

“This kind of thing is definitely bullish for the agricultural sector. It’s a really good entry point for commodity markets at the moment,” Romain Lathiere, head of dealing at Diapason Commodities Management, told Reuters.