Speculators are cutting their exposure to commodities to levels not seen since the recession of two years ago as fears grow of a global slump.
The US Commodity Futures Trading Commission (CFTC) reported that long positions across 18 key futures and options contracts fell 25% last week. That means the tally of outstanding positions is back where it was in July 2009 as investors liquidate their holdings.
Prices of many commodities are falling even though consumption, especially in the Far East, is strong. But poor sentiment is weighing on markets as worries persist about the unstable economic backdrop.
Roxana Mohammadian-Molina, an analyst with Barclays Capital, said: "Ongoing macroeconomic uncertainty has kept a lid on commodities prices so far this year, and price performance has been a lot weaker than demand might suggest."
Many base metals, such as copper and nickel, are down between 20% and 30% since the summer. But a report from Macquarie, the Australian bank, shows the sell-off has also spread to "soft" commodities such as cotton and corn.
The findings show how the recent boom in agricultural prices is tapering off as investors seek what they perceive to be less risky asset classes, such as US treasury bonds. However, falling prices will mean cheaper food for consumers and a reduction of inflationary pressure in the UK and elsewhere. On Tuesday, chancellor George Osborne blamed high prices for energy and agricultural products as part of the reason for the UK's "economic slowdown".
Macquarie says the outlook for cotton is particularly gloomy with the bank's analyst Kona Haque saying: "Very negative global economic sentiment means a dismal picture for the textiles and clothing industry, which in turn is putting [downward] pressure on fabric and yarn orders."
Cotton prices have fallen from $2.20 a pound in March to just under $0.93 (59p) on Wednesday. The price of cocoa has fallen in the last nine months from $3,700 a tonne to $2,200. Corn was trading at $7.90 per bushel in June, but is now at $5.90.
Macquarie adds: "Markets have been tumbling not just on macro uncertainty or the stronger US dollar, but also on deteriorating fundamentals. Corn, sugar and cocoa are trending lower as newly harvested supply growth weighs on the market. As for cotton, we are not hopeful of any meaningful rebound for prices in the near term."
Speculators's net long positions are more than eight times larger than at the bottom of the slump in 2008, when the leading GSCI commodities index tumbled more than 40%. Nevertheless, CFTC data show holdings are down 64% from a record 1.56m contracts recorded in September 2010 when the global economy rebounded. "The events in Europe have cast doubt on global economic growth," said Walter Hellwig of BB&T Wealth Management. "People are moving out of riskier assets."
The GSCI index is only marginally ahead of the FTSE in percentage terms in 2011.
But Chris LaFemina, an analyst at Jefferies, struck an upbeat tone when he said: "While macro risks due to sovereign debt problems in developed economies are clearly a concern, more accommodative monetary policy in China and elsewhere should stimulate demand and lead to higher commodity prices over the coming months."
Observers say commodities indices would look a lot worse if oil were not included. Brent crude has held up at over $100 a barrel despite the threat of recession in developed countries.
Meanwhile, commodities group Glencore has terminated a deal to buy a majority stake in a Peruvian copper mine for $475m from Hong Kong-based CST Mining. The proposed transaction fell apart when Glencore failed to clinch a marketing deal to its liking with CST's joint venture partner.
