Confectioners may benefit as speculators exit commodity markets

Turmoil in the global financial markets could, ironically, offer relief to prices in the commodity exchanges, where leading confectioners lock in key raw materials for their formulations, with evidence this week suggesting a wave of non-commercial speculators are selling their positions.

With an eye on the soaring prices of key food commodities in the past 12 months, investors have thrown billions of dollars at the commodity markets in a bid to make a quick buck.

Indeed, some observers have argued that this massive influx of funds – from Wall Street banks to hedge funds – actually played a role in pushing up food prices for the food industry and, in turn, for consumers.

In its annual Agricultural Outlook report, the UN's Food and Agricultural Organisation warned in May that "a key concern [for prices] is the participation of new agents that are perceived to be motivated by risk-diversification to the exclusion of serious assessment of price levels".

It added that "increased price volatility seems a plausible result give the volume of these non-commercial investments".

But fresh figures released from the US Commodity Futures Trading Commission (CFTC) reveal that as the global credit crisis deepens, the number of speculative positions is falling. For example, from 30 September to 7 October, the exchange registered a 73 per cent fall in speculator positions for sugar, free-falling from 43,005 (long positions - a commitment to buy) to 11,413 (long positions). Long positions for corn also dropped, from 98,244 to 73,297.

If, as is suggested by the FAO, "the aggregate effect of all their [institutional investors] activities may be upward pressure on derivative market prices in the short term" then, arguably, as the funds start to exit the commodity exchanges, confectionery makers could see a softening in price for key raw materials and their ingredients, from starches to oil.

Despite these recent exits, the role of the speculator in contributing to food prices is far from off the radar. At the beginning of this month, the CFTC announced it will serve as co-chair of an international task force designed to study oversight of commodity markets on a global scale.

"The global commodity derivatives markets have undergone profound changes due to electronic trading, globalisation, financial innovation and the entry of new trading participants. Recognising these evolutions, IOSCO’s Technical Committee has charged the TFCM with examining the current supervisory approaches for overseeing commodity markets worldwide," said the CFTC.

The CFTC will co-chair the International Organisation of Securities Commission’s (IOSCO) newly-created Task Force on Commodity Markets (TFCM), along with the UK's Financial Services Authority (FSA).

Leading players in the food industry, such as Nestle and agribusiness giant Cargill, have been using the commodity exchanges for many years to help manage risk to their raw material supply chains.

When ConfectioneryNews.com asked Nestle last week about the potential impact of the global financial crisis on pending transactions for the group's derivatives and futures positions, and particularly the impact of the bail-out of global US insurer AIG, a key insurer of derivatives on the commodity index, a Nestle spokesperson responded: "In keeping with its culture of taking the long-term view, Nestlé has strong systems and legal agreements in place to protect its financial interests."

"Over the last 12 months, the company has taken steps to significantly mitigate any exposure to financial risks," the Swiss firm told ConfectioneryNews.com.