Fund Managers Hate Commodities // EU Deforestation Law Disaster
The Commodity Report #173
Fund Managers Hate Commodities
According to the latest BofA fund manager survey, investors continue to sell commodities. Allocation-wise we’re now back at levels we were at the beginning of the pandemic back in 2020. Long commodities is now a contrarian trade again.
Bonds and gold are also the preferred store of value at the moment for BofA’s Michael Hartnett. The strategist — who was largely bearish on stocks last year and has previously expressed his preference for bonds in 2024 — said that stocks are now pricing in more Fed easing and about 18% earnings growth for the S&P 500 by end-2025.
It doesn’t “get much better than that for risk, so investors are forced to chase” the rally, Hartnett wrote in a note. Still, he cautioned that “bubble risks” are returning and recommended buying the dip in bonds and gold.
But - also the long gold trade becomes slightly crowded according to the BofA data - of course, the long gold trade has much more room to go sentiment-wise, but I think it is important to highlight that the trade has in fact reached a consensus view by now.
EU Deforestation Law Disaster
Major cocoa traders have asked the European Union to delay new environmental rules aimed at tackling deforestation amid mounting criticism.
The trade group, which represents top chocolate companies including Barry Callebaut AG and Cargill Inc., called for an extension of the transition period for at least six months after several milestones including the publication of formal guidance have been reached.
(If the law really starts next year - it would probably also hit coffee producing nations like Brazil and Vietnam, which would be a major disaster, as it could temporarily cut countries from its supply chain amid uncertainty about their compliance with the rules)
The EU deforestation regulation (EUDR), which targets commodities such as cocoa, palm oil and rubber as well as coffee, is set to come into force on December 30. But the European Commission has yet to publish compliance guidelines.
“Given these shortcomings, the implementation of the EUDR is respectfully, heading towards critical failure with serious consequences for the cocoa supply chain,” the ECA wrote in a statement that Bloomberg cited. It also wrote that the “bureaucratic monster threatens the supply of animal feed and the trade of many consumer goods.”
The ECA cited operational difficulties in a crucial information system, including its ability to process millions of farm data adequately, and uncertainty around how member states will interpret the legislation.
The letter comes barely a week after German Chancellor Olaf Scholz pushed back against the regulation, adding to objections voiced by some nations, including Brazil, Indonesia and Malaysia, which argue it will have a negative impact across global commodities markets.
In other cocoa news, the FT reported that US and UK cocoa prices decoupled from each other amid the ongoing global shortage of the beans. The reason for the decoupling is a difference in the quality of the stocks in warehouses. Please use the sharing tools found via the share button at the top or side of articles. Stocks of harvested beans are emptying, with US inventories at 15-year low and warehouses in London the lowest since 2021. What is left in London is a “poisoned pill”, said Martijn Bron, who was global head of cocoa and chocolate trading for agricultural commodities giant Cargill until 2022.
In Other News…
2016 founded Brazilian company Agrogalaxy Participacoes SA filed for bankruptcy last week. The agricultural company is involved in the commercialization of agricultural inputs, seed production, origination, storage and commercialization of grains
The mix of lower commodity prices, higher interest rates, “adverse climate events” and increasing production costs boosted delinquency rates among the farmers it sells crop inputs to, hitting its liquidity, Agrogalaxy said.
The company went public in 2021. This year its stock lost roughly 80% of its value.
This week, look out for the following:
Flash PMI’s on Monday
Richmond Manufacturing Index on Tuesday
Durable Goods Orders on Thursday
Core PCE Price Index on Friday
A subscription costs $29 a month, and you will receive an additional in-depth report called “The Kuemmerle Report” every Sunday evening at 6:00 PM CEST. The report covers all liquid commodities, like in the sample above visualized. On top of that you get our takes on weather patterns as well as our latest economic outlook. That information will only be published to members and not the general public.
Till next Monday, Lukas
If you have any questions in the meantime, please feel free to contact me via X or Mail.