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Global funds that have invested tens of billions of dollars in soft commodities are turning to Australia's developing grain and wool futures market for a new play.
Garry Booth, trader at commodities broker MF Global, estimates that international funds now account for 25 per cent of open interest positions in wool futures on the Australian Securities Exchange (ASX), up from zero three years ago.
Fund buying has helped boost wool futures' trading volume, which rose 13 per cent to A$495 million (Dh1.7 billion) for the 12 months to the end of February. Pushed up by speculators, Australian wool prices rose by 22 per cent between last July and this January as a result of Australia's worst drought for a century.
The offshore interest in Australia's wool contract is fundamental, says John Clennow, London-based executive director of risk management products at UBS.
"There's an increasing interest in fibres sparked by US cotton futures which have driven prices up 30 per cent in just three weeks. That's supporting wool prices and investors are starting to say what's good for cotton should be good for wool and they're investing in Australia which supplies a third of the world's wool."
Funds are buying textiles, and Australian wool is part of the trend. But they are also moving into wheat as they look for an arbitrage between the various grain markets around the world.
Booth expects that trend to continue while the world focuses on agflation, or commodity-price driven inflation.
While global fund participation in grain futures is much lower than 25 per cent - it is estimated that offshore funds account for five per cent of open interest positions - the percentage increase is sharp and significant given it has come from a low base within two years.
"As funds diversify their portfolios globally and become significant investors in world grain futures contracts, they have continued to move into other grain markets and we are starting to see the flow-on effects in Australia," Booth says.
According to Australian Stock Exchange figures, the nominal value of grain volume traded in the past 12 months is A$1.5 billion, a 50 per cent increase on volume traded in the previous year.
Reporting structures
It is hard to see exactly where the offshore money is coming from since Australia does not have the same reporting structures that exist in North America.
Dougal Hunter, executive director of the stock exchange, the ASX, suggests that the international fund activity in the local market is through niche funds since bigger funds require more liquidity.
This view chimes with Michael Pitts, head of commodity sales at NabCapital, who says ASX grain futures are a growing contract but that there needs to be substantial increase in liquidity for big funds to be attracted.
He thinks there is potential for the grain market to grow over the next couple of years as Australia deregulates its wheat market but is waiting to see what happens.
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