Record interest in Europe's agricultural commodity futures is set to grow even further in 2007 as low global stocks and the biofuels revolution attract more investors to the sector, analysts said on Wednesday.
"We're expecting big new net inflows into agriculture and we're expecting fund managers to restructure fund allocations away from energy and metals into agriculture, particularly those with a biofuels theme," Lausanne-based sugar analyst Jonathan Kingsman of Societe J. Kingsman told Reuters.
Barclays Capital said this week that another $50 billion could flow into the commodities sector as a whole by 2008, based on a poll of 120 fund and asset managers. Market sources estimate $80-$100 billion is currently invested in commodities.
The investment bank also said that tactical investors have aggressively built net long positions in agricultural markets, now at their largest levels since 1997. "This type of allocation...would suggest shifting positions from sub-sectors highly correlated with the economic cycle - such as base metals - to sectors where correlation has been historically low as in most agricultural markets," it said.
The Euronext.liffe exchange, which operates grain, oilseed, sugar, coffee and cocoa futures and options contracts in Paris and London said this week its Commodity Products portfolio had traded over nine million lots by the end of November, setting a fifth consecutive annual volume record.
Overall commodity volume was up 15 percent year-to-date, with options showing particularly strong growth - up 59 percent. Ian Dudden, Director of Commodity Products at Euronext said this highlighted "an even broader user base that includes managed funds, individual proprietary traders and increasingly, participants from the biofuel sector".
Sean Corrigan, chief investment strategist at Diapason Commodities Management, said investor funds would continue to flow into grains next year as tight global balances gave no room to manoeuvre and cope with unforeseen supply shocks.
"After years of surplus, you now need everything in place and working properly," he told Reuters. "And if you factor in the new biofuel demand, we could see severe squeezes."
Diapason operates funds orientated towards agriculture, biofuels and non-GMOs (genetically modified organisms). European wheat prices have already delivered healthy returns to investors this year after fears that drought in Australia would cut into global supplies. Prices rose some 50 percent in October, and although they have cooled a little since, analysts still see tight grain markets ahead.
"We've seen a lot of interest in the agricultural commodities since October. A lot of people think this is the beginning of a new cycle, with agricultural markets lagging the metals and energy by a couple of years or so," Rodolphe Roche, Commodities fund manager at Schroders in London told Reuters.
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