A record level of gloom among hedge funds over arabica
coffee prices among hedge funds could be setting up futures for a near-term
bounce, despite poor supply and demand fundamentals.
Managed money, a proxy for speculators, extended its net
short position in New York arabica coffee futures and options to 35,939
contracts as of November 13, data from the US regulator, the Commodity Futures
Trading Commission said.
The increase took the net short – the advantage of short
positions which profit when prices fall over long holdings which benefit values
gain – to the highest on records going back to 2007, indicating a high level of
bearish sentiment over coffee prices.
Values have been undermined by expectations for a return to
a world production surplus in 2012-13, and for a strong Brazilian crop in
2013-14 in what is an off year in the country's two-year cycle of higher and
lower producing seasons.
"Traders are talking of a record off-cycle crop which could
comfortably be above 50m bags," London broker Marex Spectron said, in comments
which follow bearish forecasts too from the likes of Macquarie and Standard Chartered.
However, despite the bearish fundamentals, the extent of the
net short position could have primed futures for a short-term recovery, given
the prospect of a large amount of buying ahead from index funds, which offer
investors returns linked to commodity indices.
Index funds are poised in July to undertake a reweighting
exercise in which they rebalance their portfolios back to the make-up of the index
This means the purchase of commodities which have performed
badly – such as coffee, down by one-third so far this year - and now account
for smaller proportion of the fund portfolio than the relevant index would suggest.
Index funds vs hedge
"The index funds will reweight, leading to the buying of
just over 10,000 contracts," on current estimates, Marex said.
"This is a massive amount of buying, the equivalent of 2.8m
bags," which comes at a time when it appears that speculators "should soon
start to run out of bullets to fire", given the extent of their net short
Speculators' net longs in New York softs, Nov 13, (change on week)
Cocoa: 27,704, (-1,982)
Raw sugar: 12,792, (-7,934)
Cotton: -19,327, (-12,973)
Coffee: -26,830, (-2,632)
Sources: Agrimoney.com, CFTC
"Hence we look for a short-term low in the coming one-to-two
weeks," the broker said.
"Short-term, between now and mid-January, we favour a rally."
The CFTC data also showed speculators raising their net
short position in cotton above 19,000 contracts over the week, near to historic
highs, while cutting their net long in raw sugar below 13,000 lots to the
lowest in nearly five years.
And speculators reduced their net long, or turned more net
short, in most other contracts too, cutting their net long position in major US-traded
agricultural commodities by more than 120,000 contracts to 461,402 contracts,
the lowest since June, according to Rabobank.
Speculators' net longs in grains and oilseeds, Nov 13, (change on week)
Chicago corn: 202,853, (-32,585)
Chicago soybeans: 125,849 (-38,679)
Chicago wheat: 50,495, (+2,064)
Kansas wheat: 46,904, (-2,212)
Chicago soymeal: 29,379, (-16,967)
Chicago soyoil: -44,140, (-8,287)
Sources: Agrimoney.com, CFTC
However, the extent of the cut in managed money's net long position
in soybeans – down more than 38,000 contracts to the lowest since February - raised
hopes that speculators may be close to neutralising the negative impact on
prices which stemmed from a record large net long earlier in the year.
"Selling over the past several days may finally be bringing these
long positions to more manageable levels with funds seen adding to shorts," Kim
Rugel at broker Benson Quinn Commodities said.