Cotton, sugar u-turns slow hedge funds' ag selling

Hedge funds' selldown in the agricultural commodity complex slowed to a crawl as they turned less negative on cotton and sugar, offsetting in part continued bearish positioning in livestock and soybeans.

Managed money, a proxy for speculators, reduced its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to corn, by 3,844 lots in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The move extended an unusually long period of negative positioning on agricultural commodities, driven by expectations of bumper world corn, soybean and wheat supplies.

In the17 weeks since the end of April, managed money has reduced its net long in ag futures and options in all but one, taking it from 1.13m lots to 272,000 contracts.

However, the reduction this time was slowed by a more positive take on grains and, in particular, a reduction in the net shorts that hedge funds have built up in New York-traded cotton and sugar.

'Demand for cotton surged'

In cotton, hedge funds cut their net long position by 4,500 contracts, as growing signs of demand at prices which earlier this month hit their lowest since 2009 offset some of the concerns over huge supplies, boosted by stronger US harvest prospects and underpinned by huge Chinese inventories.

Speculators' net longs in grains and oilseeds, Aug 26, (change on week)

Chicago corn: 67,593, (+2,874)

Chicago soymeal: 33,289, (-9,354)

Kansas wheat: 13,177, (-2,244)

Chicago soyoil: -15,695, (-540)

Chicago soybeans: -21,940, (-5,242)

Chicago wheat: -46,798, (+3,870)

Sources:, CFTC

A drop in cotton prices close to those of polyester has improved the fibre's appeal, with forward export sales commitments for 2014-15 by the US, the top exporting country, about twice those a year ago.

Rabobank said: "Demand for cotton surged, ahead of the new crop's arrival."

Dr John Robinson, cotton marketing expert at Texas A&M University, said: "The outright speculative selling of the market has subsided, and we have seen a small amount of short covering.

"There is potentially a large amount of short covering of futures by the hedge funds should they see something bullish in the wind," he added, citing as "the most obvious portent" the next US Department of Agriculture Wasde crop report, due on September 11.

The reduction in the cotton net short ended a run of more bearish positioning which had lasted nine weeks, the longest on records going back to 2006.

Sugar reversal

For sugar, the managed money net short shrank by some 8,900 lots to 18,438 contracts, ending a run of bearish positioning which had lasted eight weeks, and being reflected in a bounce in futures early last week from seven-month lows.

Speculators' net longs in New York softs, Aug 26, (change on week)

Cocoa: 70,108, (-815)

Arabica coffee: 43,090, (+1,431)

Cotton: -5,733, (-3,980)

Raw sugar: -18,438 (+8,889)

Sources:, CFTC

However, it is "impossible to tell" if the short-covering trend "signals a change of direction, or is simply going to give [funds] more selling power into any rally", London broker Marex Spectron said.

Sucden Financial took a negative view, saying "with the markets trading a new contract low" since Tuesday, of 15.30 cents a pound for the October lot, "then it would be no surprise to find the shorts reinstated".

"We continue to see the trend as down and suspect a test of 15 cents a pound basis October  futures will not be long in coming," Sucden senior trader Nick Penney said.

'Record profits'

Conversely, in the livestock complex, hedge funds may have been too quick to cut their long positions, with prices recovering since managed money, in the week to Tuesday, cut its net long position in Chicago lean hogs to a seven-month low of 40,984 contracts.

Speculators' net longs in Chicago livestock, Aug 26 (change on week)

Live cattle: 99,037, (-5,405)

Lean hogs: 40,984, (-2,214)

Feeder cattle: 10,357, (+397)

Sources:, CFTC

In live cattle, the October contract has risen by 3% since Tuesday, when hedge funds had cut their net long position in Chicago futures and options below 100,000 contracts for the first time this year.

The price revival has been attributed to positive meatpacker margins, which as of Friday were $48 a head in the black for cattle processing and $13.22 a head for hog processing, according to broker US Commodities.

US agriculture pricing data on Thursday highlighted strong margins from beef and pork producers too, signalling strong demand for livestock from this source, with ratios of steer and hog prices to corn "now returned to levels that… indicate profits and coming expansion", a report by Paragon Economics and Steiner Consulting said.

"Cow-calf operations are enjoying by far their best year ever," with feedlots making "handsome profits" and hog producers set for "record profits" too, as long as losses to porcine epidemic diahorrea virus (PEDv) have not been too great.

Downbeat on soybeans

In the main Chicago grain and oilseeds complex, hedge funds extended their net short in soybeans nearly to 22,000 contracts, the most bearish positioning since October 2006.

The increasing likelihood of a record US crop, after the sensitive month for the crop of August passed without a severe weather threat, has encouraged investors to reduce risk premium.

However, hedge funds raised slightly their net long in Chicago corn futures and options, for which prices remain relatively low compared with soybeans, and in wheat too, amid revived concerns over the Ukraine crisis.

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