Hedge funds caught out by coffee price plunge

Hedge funds extended their bets on rising agricultural commodity prices to the highest in more than three years, although for many of the latecomers to buying spree this looks like proving a loss-making move.

Managed money, a proxy for speculators, raised its net long position in futures and options in the top 13 US-traded agricultural commodities, from coffee to cattle, by 78,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The spree took the total net long to 1.11m contracts, the highest since February 2011, as cotton was approaching record highs in New York, where raw sugar was peaking at levels above 36 cents a pound.

The more bullish positioning this time, which has seen hedge funds lift their net long position by more than 720,000 contracts in 2014, has been driven by factors including Brazilian drought, which has set back cane and coffee crops in the top producing country, US dryness, which is threatening winter wheat, and the risks to trade posed by the Ukraine crisis.

'Covering short hedges'

Indeed, managed money extended its net long position in Chicago wheat above 24,000 lots, the highest since December 2012, and a dramatic reversal from the net short position of more than 70,000 contracts at the start of 2014.

Speculators' net longs in grains and oilseeds, Mar 18, (change on week)

Chicago corn: 297,860, (+18,299)

Chicago soybeans: 198,672, (+6,024)

Chicago soymeal: 70,033, (+104)

Kansas wheat: 37,051, (+4,107)

Chicago soyoil: 33,473, (+8,091)

Chicago wheat: 24,036, (+13,521)

Sources:, CFTC

A net short position means that short holdings, which profit when values fall, exceed long bets, which benefit when price gain.

In Chicago corn, hedge funds raised their net long position to 227,860 contracts, also the highest since late December 2012.

And they lifted their net long position in Chicago soybeans to nearly 200,000 lots, the highest since September 2012, as continued evidence of strong demand for US supplies more than offset concerns over Chinese buyers cancelling cargos, or selling them on to American buyers at a steep discount.

Indeed, there a drop of nearly 13,000 lots in short soybean positions held by commercial investors was taken as evidence of Chinese selling up and ditching hedges.

"Trade has speculated that China was covering short hedges and that looks to be the case," Kim Rugel at Benson Quinn Commodities said.

Coffee plunges

However, some hedge funds have been too slow off the mark to exploit rallies in some agricultural commodities, notably in coffee, in which they raised their net long position by more than 6,200 contracts nearly to 40,000 contracts in the week to last Tuesday, March 18.

Speculators' net longs in New York softs, Mar 18, (change on week)

Raw sugar: 112,362, (+12,417)

Cocoa: 74,839, (-4,413)

Cotton: 67,576, (+4,607)

Arabica coffee: 39,838, (+6,257)

Sources:, CFTC

That is the highest net long since November 2010.

However, the benchmark May arabica coffee contract, trading at 167.25 cents a pound today, has already fallen 13% since Tuesday, and has plunged more than 20% from a high hit during the week in question, of 209.75 cents a pound.

The price plunge reflects some rain relief for central Brazil which has, besides refreshing coffee plantations, eased concerns over cane too, helping drive a smaller fall in sugar prices, of some 3% since Tuesday.

Coffee prices have also felt pressure from increasing hopes for the recovery in Colombian output, which the Colombian Coffee Federation at the weekend pegged at 11.4m bags this year, up 100,000 bags from the previous forecast, and from 10.9m bags produced last year. 

'A little bearish'

In the livestock complex, live cattle futures, undermined by profit-taking and a softening in beef prices, have also receded since they hit highs last week.

Speculators' net longs in Chicago livestock, Mar 18, (change on week)

Live cattle: 136,951, (+5,657)

Lean hogs: 70,878, (-1,473)

Feeder cattle: 13,621, (+1,527)

Sources:, CFTC

And some investors forecast further losses on Monday, after data showed US feedlots taking on far more cattle last month than had been thought, implying a richer supply for slaughter later in the year, after fattening.

"The report was a little bearish for the late summer/early fall period," Paul Georgy at broker Allendale said.

Placements on feedlots rose by 14.7% year on year, far more than the 9.1% rise investors had forecast, according to Urner Barry.

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