Top hedge funds made $1.9bn on grains ahead of the Ukraine war food price spike

A group of ten leading ‘momentum-driven’ hedge funds made an estimated $1.9bn trading on the food price spike at the start of the Ukraine war that drove millions into hunger, a new analysis by Unearthed and Lighthouse Reports has found.

They made those bumper profits with ‘trend-following’ techniques, which involve using algorithms to spot rising or falling prices and automatically buying or selling financial derivatives in response. Some experts believe this kind of automated speculative trading exacerbated the global food price crisis triggered by Russia’s 2022 invasion of Ukraine.

Unearthed and Lighthouse Reports analysed data from investment bank Société Générale’s Trend Index, which tracks the performance of the ten leading trend-following funds.

Data compiled by Société Générale suggests that food commodity trades became a key driver of Trend Index profits ahead of the Ukraine invasion, as they bought into steeply rising grain prices. In the first three months of 2022, this group of hedge funds made estimated returns of $1.9bn on wheat, corn and soybean trades, after a period of years in which they had largely made losses on these food commodities in the same three-month period.

They were among many financial institutions that made bumper profits from the steep rise in food prices last spring. Prior to Putin’s February 2022 invasion, Russia and Ukraine were the source of a third of the world’s wheat exports. By early March 2022, wheat futures prices – contracts to buy bushels of wheat at a price on a set date – had jumped 50% in a month, reaching their highest price in 14 years.

This worsened an already-developing global food crisis caused by disrupted supply chains in the wake of the pandemic and a series of weather events disrupting harvests. The World Food Programme estimates that grain and energy price rises triggered by the invasion of Ukraine tipped at least 33m people worldwide into acute hunger.

But some observers believe the price spike was driven more by financial speculation than by real food shortages caused by the war. Russia and Ukraine are major wheat exporters, but worldwide most wheat is consumed in the country in which it is grown.

These funds can exacerbate the moves that we’ve seen, they can pile into a trade

The shortfall in global exports caused by the invasion amounted to around 7m tonnes – less than 1% of the global crop, according to Michael Fakhri, UN special rapporteur on the right to food. Yet the price spiked by at least 50%.

“What explains that price is the effect of the speculation: the financial markets, the hedge funds, etc,” he told Unearthed. “Their fear, their panic, their algorithms cause the price to spike. It didn’t reflect real world supply and demand, real world readjustment to find new supply routes, real world concerns – it reflected the needs, desires and function of the financial market.”

SG Trend Index funds who spoke to Unearthed denied that their activity had inappropriately driven up food prices. One fund manager argued that speculative buying at the start of the war had been a “blessing in disguise,” because it had encouraged farmers to plant more crops. Another spokesman said modelling by Société Générale, which Unearthed and Lighthouse Reports used to estimate the hedge funds’ profits, did not “accurately represent the source of returns for our investors”.

Buying into the trend

Trend-following hedge funds – also known as momentum traders – started buying wheat and corn contracts heavily in the weeks leading up to the invasion, as news emerged of Putin’s troops massing on the Ukrainian border, according to Dave Whitcomb, an analyst at trading consultancy Peak Research. “Their goal is to get on the train early… so that they are already buying commodities before the big move,” he said. “These momentum traders were really buying on upward momentum in early February, and into March.”

Analyst BarclayHedge estimates that momentum strategies make up a small proportion of overall hedge funds, accounting to 7.5% in total.

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.

The World Food Programme warned even before the invasion that it was running out of funds, and from January 2022 8 million families in Yemen received reduced food rations. “The [Ukrainian] conflict has only exacerbated and worsened our ability to supply vouchers or cash or work with households to make sure that all of their household food needs are being met,” Maldonado said.

The food price spike had complex knock-on effects in places where hunger was already widespread, she said. “As [the] food price goes up in areas where supply chains are more fragile, like Yemen, what you see is that people stop purchasing food. And so then traders stop bringing in as much food. And so then a couple of things happen, food prices continue to go up because supply is more limited. And then in addition to that, you see food availability really become less stable.”

Asked whether it was fair to connect financial speculation to the food crisis, she said: “When we’re facing so many shocks, these additional shocks really do have a downstream impact.”

She added: “I think it would be unfair to tie [financial speculation] to the crisis in any one of these countries in full, because that would be ignoring what we know to be other shocks that are driving this, but is it having an impact? Absolutely. We see the impact on the supply chain and the purchasing.”