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All asset classes are recalibrating themselves to the higher interest rate environment and the commodity markets are no exception. We’d first like to highlight a few developments as we believe they provide important context around the current positioning and dynamics of the marketplace, before discussing other major trends that we believe will have future pricing implications.

In our opinion, higher interest rates have had two major consequences on commodity markets. Firstly, as rates moved higher, companies de-stocked to just-in-time inventory because their freed-up cash could now earn a yield. Previously, when rates were low, companies had weeks if not months’ worth of inventories on hand because their cost of capital was so low. Secondly, higher rates have also meant higher storage costs, which need to be reflected in the curve structure.

As a result, many commodity markets, especially agricultural markets, moved into contango. The resulting wide carries have encouraged speculative short selling to capture the roll yield. If we look back historically, passive short selling related to large carries would typically have been the result of burdensome stockpiles. Today, however, the passive short is trying to capture the roll yield resulting from these higher interest rates. While both scenarios aim to achieve the same outcome, they are dynamically different. In the past, the short could rely on physical deliveries as a stopgap, while the same is not true for today’s environment.

Many countries are major producers of agricultural products but here we will focus on three areas: Russia/Ukraine, Brazil/Argentina and the United States. We are seeing major changes occur in these three regions that will likely have a lasting effect on trade and potentially even alter the current composition, which has been driven by the interest rate environment.

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About the Author
Paul Caruso is currently the Director of Commodity Investments at Ancora. He joined Ancora in 2019 as a Portfolio Manager in the Alternatives group. Paul specializes in commodity investing and is primarily responsible for investment decisions and idea generation for the strategy.

Prior to joining Ancora, Paul worked as the Director of Commodities Procurement for The J.M. Smucker Company where he oversaw commodity spend risk management. From 2011-2014, Paul worked with Gamma-Q, LLC. as a Senior Portfolio Manager. There, Paul launched and managed a commodity fund focused on agriculture and livestock. Paul also has experience in trading and investment analysis from his time with Galtere International Macro Fund, Rothfos Corporation and The Windham Group Inc., where he began his career in 2002. Paul’s early career also had a focus on hedging and commodities.

Paul earned a Bachelor of Arts degree in Economics from Columbia University.

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