Morgan Stanley warned over the drop in investor interest in commodities as it followed peers such as Barclays in cutting its operations in the sector, including quitting the agriculture segment.

The investment bank, one of the best respected on Wall Street, is to maintain, and potentially grow, some areas with indirect exposure to agriculture, such as fertilizer products which, thanks to the exposure to shale gas, will be merged into the North America power and gas business.

The group's biofuels operations will be merged into the global oils division.

However, it is to quit trading agricultural products, closing also its dry freight and a small Australian power businesses, citing weaker interest in commodities from investors who this year have quit the sector in favour of a return to equities.

Fund managers this month turned their most bearish on commodities in records going back to 2006, with a net 32% underweight on the sector, a survey by Bank of America showed this week.

'Revenue pool halved'

Morgan Stanley said in a memo to staff: "The commodities revenue pool available to firms in our sector has fallen by almost 50% from the peak years of 2007-09."

The memo added: "Much of this decrease is due to cyclical factors, and we firmly believe that the cycle will turn again in our favour in the future,.

However, the bank said that "the revenue pool has also been impacted by certain secular headwinds – such as increased regulatory compliance and capital costs as well as changes in the way in which clients interface markets".

Clampdowns introduced on banks in the wake of the global financial crisis, notably the Dodd-Frank financial reforms, have been seen as increasing banks' capital costs, increasing the pressure on divisions to prove their commercial worth.

Bank rethinks

Morgan Stanley's withdrawal from agricultural commodities follows retreats by some other banks too, including Germany's DZ Bank and Barclays, although these two cited moral cause, with crop trading blamed by some anti-hunger campaigners for boosting food prices.

Antony Jenkins, the Barclays chief executive said in February that the bank was quitting speculative trading in grains and soft commodities for "reputational reasons".

Commerzbank earlier this year removed agricultural commodities from a commodity index fund.

And Deutsche Bank last year launched a review into the issue, but in January stuck by agricultural investment products, saying that the investigation found "no evidence that speculation was responsible for price developments".

Hedge fund losses

Morgan Stanley's withdrawal from ags is believed to have been based on commercial grounds, reflecting the decreasing interest in commodities reflecting poorer profitability, with hedge funds said to have suffered losses in both 2011 and 2012.

Ann Berg, a former director of the Chicago Board of Trade, warned last week that hedge funds may be in retreat from agricultural commodity markets, with a "disastrous" bet on corn futures earlier this year adding to the pressures on profitability.


 

agrimoney