The hedge fund exodus from bets on rising sugar prices may not be over yet, even after one of the fiercest sell-downs on record, amid a broad turn bearish on agricultural commodities.
Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded farm commodities by more than 78,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.
The decline, the biggest in four months, reflected in part a further increase in hedge funds' net short position in Chicago wheat, which was raised by nearly 8,000 contracts to 55,199 lots, a level beaten only once in records going back to 2006.
Hedge funds' net short position – the extent to which short bets, which profit when values fall, exceed long holdings, which benefit when prices rise – has in wheat been undermined by a late improvement in Russian winter sowing conditions and ideas that US wheat has lost some competitiveness.
But with historically high net short positions raising questions over the extent for further such holdings, Chicago wheat futures have revived, rising in early deals on Monday by 0.5% to $6.53 a bushel for December delivery, setting course for what would be the first spell in more than a month of three consecutive positive sessions.
Sentiment on sweetness sours
However, the biggest turn bearish in sentiment was seen in New York raw sugar futures and options, in which hedge funds sliced their net long position by more than 30,000 contracts to 136,000 contracts.
In two weeks, speculators have now cut their net long position in the sweetener by more than 58,000 contracts - one of the biggest turns bearish in positioning on record.
Speculators' net longs in New York softs, Nov 19 (change on week)
Raw sugar: 136,545, (-30,104)
Cocoa: 75,489, (-1,786)
Cotton: 4,908, (-976)
Arabica coffee: -22,936, (+3,387)
Sources: Agrimoney.com, CFTC
The reduced optimism over prices reflects improved hopes for Indian and Thai crops and a recovery in output in Brazil the top producing country, after rain delays to the cane harvest.
The sell-off has fuelled a decline in futures which, on Friday, hit 17.33 cents a pound for March delivery, a two-month low for the contract and down 14.0% from an October high.
'Further selling pressure possible'
Even so, the bearish trend in hedge fund positioning may have further to run, brokers warned.
"The sugar market has only posted three separate gains so far this month, and a retest of the mid-year contract lows of 16.7 cents a pound cannot be ruled out," Luke Mathews at Commonwealth Bank of Australia said.
Speculators' net longs in grains and oilseeds, Nov 19, (change on week)
Chicago soybeans: 129,393, (+8,502)
Kansas wheat: 34,730, (-8,597)
Chicago soymeal: 49,345, (2,015)
Chicago soyoil: -32,359, (-9,267)
Chicago wheat: -55,199 (-7,948)
Chicago corn: -146,086, (7,026)
Sources: Agrimoney.com, CFTC
The CFTC report "confirmed that the current price decline has been accompanied by heavy speculative selling and modest consumer buying.
"Nevertheless, speculative investors continue to hold a very large net long position, meaning further selling pressure is possible."
At Sucden Financial, Tom Kujawa, co-head of the broker's softs department, said that "there seems to be a sense that the funds who haven't bailed out of long positions are sitting ducks, and the chat/gossip is centred on what [price] level will need to be triggered to flip them out".
Weakness in the physical sugar market, where cash premiums for export from the Brazilian port of Santos on Friday set a "new recent low, we hear", must "surely be a little unnerving for the bullish value funds out there who perhaps have invested on the previous prospects of tightness around a short tail off in Brazil", Mr Kujawa said.
"Furthermore the spectre of Indian exports looms over the market.
"We continue to think there is more potential for lower prices, and are conscious of a potentially disorderly exit from some longs in the speculative community."
Hedge funds also turned less positive on New York-traded cotton futures and options, cutting their net long position for a seventh successive session, to take it below 5,000 contracts for the first time this year.
The sell-off, the longest since spring 2011, has been fuelled by concerns that China is to alter the generous stockpiling programme aimed at supporting farmers, but which has lifted global prices too.
Speculators' net longs in Chicago livestock, Nov 19, (change on week)
Lean hogs: 70,395, (-10,936)
Live cattle: 84,086, (-10,944)
Feeder cattle: 8,539, (-438)
Sources: Agrimoney.com, CFTC
And they slashed net long exposure to lean hog and live cattle futures, amid weaker prices of pork, which fell last week to their lowest since May, and beef.
"Cattle futures have been pressured by expectation for retail demand for to slow ahead of the holiday buying season," broker US Commodities said.
"Falling beef prices for both choice and select grade [beef] cuts have further fuelled those demand concerns."
Return to corn price pessimism
Hedge funds also returned to increasing their net short position in corn, after a two-week period of taking profits on these holdings, encouraged by a US Department of Agriculture report estimating domestic stocks at the end of 2013-14 lower than invested had expected.
However, a prospective cut to the amount of ethanol which must be blended into US gasoline has reinvigorated bears, in signalling lower demand for corn-based biofuel.
Hedge funds' net short position in corn "is likely manageable, given the inability of the market to sustain [upward] momentum", said Brian Henry at Benson Quinn Commodities.