Hedge funds are making significant moves into agricultural commodity markets tied to biofuel production, as the war involving Iran triggers sharp increases in energy markets and heightens concerns over potential long-term disruptions to fuel supplies through the Strait of Hormuz.
Data from the US Commodity Futures Trading Commission shows that since the outbreak of the Middle East conflict, funds' net bullish bets on soybean oil, a key ingredient for biodiesel, have nearly tripled. Regarding corn, a primary feedstock for ethanol, funds have shifted from previously bearish positions to their highest net long positions of the year.
Hedge fund managers and traders indicate that with oil prices surging since the conflict began, many funds view agricultural prices as the next market poised for significant movement.
"This isn't just a steady rotation," said Doug King of RCMA Capital, commenting on the rapid shift in hedge fund positioning in these soft commodities. "This is a blitz." King, whose firm manages The Merchant Commodity Fund, added that funds have "piled into" the soybean oil market, attracted by soaring processing margins and expectations that governments will accelerate domestic biofuel production in response to energy market shocks.
As the war involving Iran has pushed oil prices from around $72 to over $100 per barrel, demand for corn, sugar, and vegetable oils is increasing. Governments are seeking to reduce dependence on imported hydrocarbons by expanding domestic biofuel output.
Simultaneously, global fertilizer supplies are being squeezed. Before the conflict, up to one-third of global nitrogen fertilizer export trade transited the Strait of Hormuz, which is now almost completely closed. Reduced natural gas flows are also limiting fertilizer production elsewhere. Fuel shortages are additionally driving up costs for farming operations and for the transportation, processing, and preparation of food.
The United Nations has warned that sustained high fertilizer and fuel prices could lead to a global food crisis if the war continues.
However, the reaction in agricultural markets has been less pronounced so far, with corn up only about 6% and soybean oil up approximately 23%.
Hakan Kaya, a portfolio manager at Neuberger Berman, stated he is positioning in agricultural commodities to gain exposure to potential increases in biofuel and food prices. He has reduced direct exposure to oil and natural gas due to the risk of sudden price swings triggered by military escalation or ceasefire talks.
"Looking at energy now, whether we move towards de-escalation or further escalation is a binary bet, nearly impossible to know," he said. "But we know one thing: if energy prices remain at these elevated levels, they will spill over into other areas like agriculture."
His firm has been building a "proxy basket" of agricultural commodities likely to benefit from energy market volatility and inflation, including corn, soybean oil, canola, and livestock.
He noted that corn is becoming "a proxy bet on gasoline," adding that vegetable oil prices are also increasingly linked to fuel markets.
The view that agricultural commodities are being driven by fuel demand is particularly evident in the United States. Policymakers there have expanded access to higher ethanol blends like E15, partly to support American farmers.
US growers, a key voter base for former President Donald Trump, have been impacted by trade tensions and rising fertilizer costs. Investors anticipate the government will offer further support for domestic biofuel feedstocks over imported alternatives.
Vegetable oils like soybean oil, canola oil, and palm oil are now major biodiesel feedstocks, while approximately 40% of US corn demand comes from ethanol production.
The conflict involving Iran is accelerating this trend as governments seek to reduce reliance on vulnerable oil supply routes. In Asia, where biofuel demand is growing, Indonesia's government is preparing to mandate a 50% biodiesel blend starting in July, and Malaysia is discussing expanding its biodiesel blending mandate beyond the current B10 program.
Archer-Daniels-Midland, one of the world's largest agricultural traders, raised its full-year profit forecast last week despite a weaker first quarter. CEO Juan Luciano stated that soybean crushing and ethanol margins "improved significantly" following strengthened US biofuel mandates. He added that "perceptions of shortage, given the Strait of Hormuz issues," could be boosting soybean demand, while warning that rising energy and chemical costs are increasing farmers' input prices.
RCMA's Doug King suggested that despite the Middle East conflict, actual crop shortages and grain price spikes might never materialize. "This is not an agricultural shock. It's an oil shock," he said, explaining that the ripple effects on agriculture stem from higher biofuel demand, not from any immediate crop shortage.
However, UN food agencies warn that diverting more crops for biofuel could worsen any impending food supply crisis.
Neuberger Berman's Kaya concluded, "If you see crops being used for energy instead of food, then we are certainly heading straight for a food crisis."
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