But Whitcomb argues that the volume of buying by momentum traders distorted the market last spring. “These funds can exacerbate the moves that we’ve seen, they can pile into a trade. And because they’re buying futures contracts, because they’re buying wheat, or buying coffee or buying corn, that buying interest will drive prices higher than where they might otherwise be. So for consumers who are buying pasta, or cereal, or anything made of wheat, in the spring of 2022 – they were paying higher prices because of momentum traders.”
However, one fund manager of an SG Trend Index hedge fund told Unearthed that firms such as his played an important role in commodity markets, helping to share financial risks and helping producers gauge demand and pricing.
Harold de Boer, CEO of Rotterdam-based hedge fund Transtrend, agreed that speculation “may have been a part” of the spikes in food commodity prices, but argued this was “a blessing in disguise, because the effect of it has stimulated farmers to seed more [crops], which resulted in having enough production, far more production than it would have been without us.”
He added: “We are somewhat like a dentist, we will tell our clients that they should brush their teeth and so on. But if they don’t, we earn more.”
De Boer said that his fund had been buying grain contracts throughout the second half of 2021, as post-Covid supply chain disruptions, extreme weather and competition from biofuels impacted supplies of key crops. “But then the price exploded due to the Russian invasion, and all these people suddenly started to buy the stuff we were selling. And the price was going too high,” he said.
He argued that other market participants, such as “passive” index-fund investors, distort the market far more than momentum traders.
He said: “Was there overreaction in some commodity prices after March, after the invasion? Yes. But could anything be done about that? No, not really, you cannot expect markets to function much better than that.”
De Boer added that his fund had ended up losing money on wheat trades in the extreme volatility that followed the invasion. “But that’s the game,” he said.
A spokesman for AlphaSimplex, another of the Trend Index funds, said: “The research is based on an index and includes a number of assumptions and hypothetical returns. While we do not comment on hypothetical returns, we can say the hypothetical returns suggested by this research do not accurately represent the source of returns for our investors.”
Unearthed approached all 10 members of the SG Trend Index for comment. The others all declined to comment or did not respond.
Kate Maldonado, senior director of food security at Mercy Corps, said that rising wheat prices were having a severe impact in food crisis hotspots across the world. She gave the example of Yemen, a country that imports 90% of its staple crops and where much of the population relies on food aid after almost a decade of civil war.