Hedge funds bet on biofuels to profit from Iran oil price shock
Traders expect corn and soyabeans to soar as demand for alternative fuel sources rises
Hedge funds are piling into agricultural commodities used to make biofuels, as the Iran war drives a huge surge in energy markets and increases fears of prolonged fuel supply disruptions in the Strait of Hormuz.
Funds have almost tripled their net bets on soyabean oil, which is used to produce biodiesel, since the start of the conflict in the Middle East, according to data from the US Commodity Futures Trading Commission. In corn, an ingredient in ethanol, they have switched from being positioned for falling prices to their highest level of positive bets this year.
With oil already having soared since the outbreak of the conflict, many funds see agricultural prices as the next market to take off, say hedge fund managers and traders.
“I don’t think it’s just a steady pivot,” said Doug King, head of RCMA Capital, of the rapid change in hedge fund positioning in these soft commodities. “I think it’s a blitzkrieg in.”
King, whose firm runs The Merchant Commodity Fund, added that hedge funds had “piled in” to soyabean oil, attracted by soaring processing margins and expectations that governments will accelerate domestic biofuel production in response to the energy shock.
With the US-Israeli war against Iran having driven up the price of oil from $72 a barrel to more than $100, demand is growing for corn, sugar and vegetable oils, as governments seek to reduce dependence on imported hydrocarbons by expanding domestic biofuel production.
Meanwhile, global supplies of fertiliser are being squeezed by the almost complete closure of the Strait of Hormuz, which before the conflict handled up to one-third of globally traded nitrogen fertiliser exports, while reduced gas flows have curtailed fertiliser production elsewhere. Fuel shortages are also driving up the cost of farming and of moving, processing and cooking food.
The UN has warned that the war, if it continues, risks unleashing a global food crisis due to rising fertiliser and fuel prices.
However, so far the reaction in agricultural markets has been less severe, with corn rising only around 6 per cent and soyabean oil up around 23 per cent.
Hakan Kaya, a portfolio manager at Neuberger Berman, said he is betting on agricultural commodities to position for potential rises both in biofuel prices and food prices. He has reduced direct exposure to oil and gas because of the risk of sudden price swings triggered by military escalation or ceasefire negotiations.
“If you look at energy now, it is a binary bet whether we de-escalate or escalate further, it’s almost impossible to know,” he said. “But we know one thing: if energy prices stay high at the current levels, they will spill over to the rest of the agricultural space.”
The firm has been building “proxy baskets” of agricultural commodities that could benefit from the shock to energy markets and inflation, including corn, soyabean oil, canola and livestock.
Corn is becoming “a proxy bet on gasoline”, he said, adding that vegetable oil prices are also increasingly tied to fuel markets.
The market’s view of agricultural commodities as being driven by fuel demand has particularly been a feature in the US, where policymakers have expanded access to higher ethanol fuel blends such as E15, in part to support US farmers.
One of President Donald Trump’s key voter bases, American growers, have been hit by trade tensions and rising fertiliser costs, and investors expect further support for domestic biofuel feedstocks over imported alternatives. Chinese purchases of US soyabeans are expected to be discussed when Trump meets Chinese President Xi Jinping this week.
Vegetable oils such as soyabean oil, canola and rapeseed are now major biodiesel feedstocks, while roughly 40 per cent of US corn demand comes from ethanol production.
The Iran conflict is accelerating that trend as governments seek to reduce exposure to vulnerable oil supply routes. In Asia, where demand for biofuels is growing, the Indonesian government is preparing to launch a 50 per cent biodiesel blend requirement from July, while Malaysia is discussing expanding biodiesel blending requirements beyond its current B10 programme.
Archer-Daniels-Midland, one of the world’s largest agricultural commodities traders, raised its full-year earnings guidance last week despite weaker first-quarter profits, with chief executive Juan Luciano saying soyabean crushing and ethanol margins had “strengthened meaningfully” following stronger US biofuels mandates.
He added that demand for soyabeans may have been boosted by “the perception of shortages, given the Strait of Hormuz issues”, while warning that higher energy and chemical costs were pushing up input prices for farmers.
Despite the conflict in the Middle East, crop shortages and soaring grain prices may never materialise, said RCMA’s King.
“It’s not an agricultural shock. It’s an oil shock,” he said, adding that the knock-on effect in agriculture was coming from higher biofuel demand, rather than any immediate shortage of crops.
The UN’s food and agriculture agency, however, has warned that greater use of crops for biofuels could worsen any impending food shock.
“If you . . . see crops being used for energy rather than food, then, surely . . . we’re heading straight into a food crisis,” said Neuberger Berman’s Kaya.