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Hedge funds' bearish turn on ags sets 2013 record

Hedge funds' negative streak on positioning in agricultural commodities extended to its longest this year, fuelled by an increase to a record high in the net short on wheat – a rise which may provoke a buying ahead.

Managed money, a proxy for speculators, cut its net long in futures and options in the top 13 US-traded agricultural commodities by nearly 14,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission, the US regulator.

That was the fifth week running that hedge funds have reduced their net long position – in which long bets, which gain when prices rise, outnumber short holdings, which profit when values fall – the first such losing streak in 2013,

And it reflected bearish positioning in Chicago wheat, which may be at an end for now, and in New York raw sugar, where hedge funds look like having more to sell.

Switch to buying?

In Chicago wheat, speculators raised their net short position by more than 10,000 contracts to 66,041 lots, the biggest bet on price falls since records began in 2006.

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

Chicago soybeans: 146,168, (+16,775)

Chicago soymeal: 54,009, (+4,664)

Kansas wheat: 19,133, (-5,597)

Chicago soyoil: -26,690, (+5,669)

Chicago wheat: -66,041 (-10,842)

Chicago corn: -141,051, (+5,035)

Sources: Agrimoney.com, CFTC

However, extreme net short or net long positions have a history of deterring further such bets, with concerns among hedge funds that they may prove the last to make the bet, and be left wrong-footed by a change in sentiment.

"There's some question as to whether or not the trade is going to be willing to press the wheat markets in the face of the net short fund position in Chicago continuing to grow," Brian Henry at Benson Quinn Commodities said.

Indeed, it is "worth noting that funds were modest net buyers last week".

When the previous record net short was set, in February last year, it halved over the next two weeks, fuelling a recovery of more than 3% in Chicago futures.

'Bleeding funds'

Managed money turned bearish to an even greater extent on New York raw sugar futures and options, by nearly 24,000 contracts.

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

Raw sugar: 112,627, (-23,918)

Cocoa: 77,526, (+2,037)

Cotton: 7,360, (+2,392)

Arabica coffee: -21,516, (+1,420)

Sources: Agrimoney.com, CFTC

However, with hedge funds still retaining a relatively large net long position, of more than 112,000 contracts, this sell-off was not seen as a deterrent to further short holdings.

In sugar, "the bears are still planning a bountiful Christmas," given the extent remaining of the net long position, Thomas Kujawa, co-head of the softs department at Sucden Financial, said, foreseeing a further decline in prices.

"Once it's clear the bleeding funds have cut their length the trend may well turn. We only expect a bear profit take once it's clear the stubborn bulls left… have cut out."

Raw sugar futures fell for a 10th successive session on Tuesday, by 0.9% to 16.82 cents a pound for March delivery, the contract's weakest close in four months.

Negative on hogs

Speculators also continued a reduction of their net short in Chicago lean hog futures and options, by 6,565 lots to just under 64,000 contracts, a four-month low, undermined by a seasonal slowdown in demand, with wholesalers already largely covered for the Christmas holiday.

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

Lean hogs: 63,974, (-6,565)

Live cattle: 79,706, (-4,380)

Feeder cattle: 7,519, (-582)

Sources: Agrimoney.com, CFTC

However, they boosted long exposure to the soybean complex, amid ideas of firm Chinese demand and strong US consumption of soymeal, while recovering palm oil has provided a prop to soyoil, the rival vegetable oil.

In New York cotton, hedge funds turned more positive too, ending a seven-week spell of cutting their net short position, which helped send futures to a 10-month low on November 22.

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