Soya and coffee tell a tale of two beans affecting CTA funds differently

Soybeans have proven a volatile smaller market to trade as worries over drought and Chinese demand have thrown futures prices around, disturbing some CTA funds' bets in a market largely lacking direction in May.

However, the main focus of most funds in May continued to be the up-again, down-again fortunes of the Brent Crude barrel.

Martin Lueck, Aspect Capital's director and joint head of research, notes that the firm's Trading Fund worked in markets that showed "little clear direction" in May, and ended the month down 1.79%.

Titanium Capital's commodity programme also noted uncertainty in markets in April and May, significantly increasing short-term volatility.

"Short-term risks in the commodity markets have increased, while opportunities have decreased," Titanium's managers say. "Although we were able to take advantage of very modest and tightly contained opportunities in both cocoa and copper, our approach to risk management means that we will only have significant exposure when both the investment cases and the risk/reward profiles are appropriate," they add.

News of impending Chinese rate increases have affected short-term sentiment to base metals, the firm adds, as has debate over the US dollar.

"If the Fed feels the need to tighten, it will suddenly realise it is way behind the curve. We can see arguments for rates (at year's end) being either within 25bp of unchanged or significantly higher than the consensus forecast of 2%," the company adds.

Oil drove CTA markets again in May, breaching $40, and Aspect's position in energy reacted well to this. At the start of June, CTAs' involvement in crude attracted attention from Michael Rothman, Merrill Lynch's senior energy market specialist, who said oil's all-time highs necessitated "concrete action…to lever cash and futures prices lower. There is little doubt on our part that such physical theatrics have become requisite to force hedge funds to unwind their massive net long position," he added. OPEC acted during the month, increasing production from July.

Lueck says commodities also offered opportunities, with agriculturals displaying the highest volatility. Coffee rose 6.5% in just one day, he says. Paul Touradji, co-founder of New York's now-closed Catequil fund, says it was "quite alarming" that momentum traders on LIFFE held short positions in coffee equivalent to more than one third of the open interest.

"When the market turns, they will not only have to cover this position but will likely go long," he says. Over the coming 12 months, Touradji predicts a doubling in coffee price, dubbing the situation the most exciting opportunity he has seen in five years.

The International Coffee Organisation Brazil Naturals price index has risen from 57 cents per pound in December 2003 to 73 cents per pound on 11 June.

Titanium noted in mid June that coffee fundamentals remained "finely balanced, (and) the market has risen sharply on the back of rumour, developing into fear, about the involvement of a high-profile fund in the physical market."

Mulvaney Capital Management's Global Diversified programme fell by 6.99% in May, according to the group, adding to its 11.5% decline in April, with May's fall attributed largely to a 20% drop in soybean prices on reports of waning demand, as well as a sharp decline in Japan's stock market.

Aggressive reduction of, or complete exit from, many positions in response to this has left the fund's margin-to-equity ratio near historic lows with "the main new positions over the past several months (being) long oil and short interest rate products." Overall, Mulvaney's fund is down 4.79% to the end of May in 2004, but was up 29.28% last year and 19.37% in 2002, according to figures from the firm.

Mulvaney was not alone in being hurt by soybean surprises. At June's outset, fund and other commodity traders were found to have bought heavily into soybean futures contracts, with the Commodity Futures Trading Commission announcing that speculators' net long position in this market had risen 26% in the two weeks to 4 June.

The move followed a 21% fall in soybean prices over the three previous weeks on news global soybean production would rise 19% in the 12 months starting on 1 October.

key points

Oil continued to play a key role in CTA funds' returns in May as OPEC agreement on increasing production pushed the barrel price down.

Soybeans proved volatile as production from the Americas fell, while warnings of falling demand sent prices plummeting.

Some traders expect the coffee price to double in the next year, and many traders are currently short the bean.