PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 11:51 UK, 27th Mar 2017, by Mike Verdin
Hedge funds cut bullish ag bets, as 'Trumpflation trade' reverses

Hedge funds cut their bullish betting on ags to the lowest in nearly a year, regulators revealed, amid growing doubts over the "Trumpflation" trade but potentially setting up grain markets for hefty volatility later this week.

Managed money, a proxy for speculators, chopped its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 151,393 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The cut reduced the net long the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall to 233,242 contracts, the lowest since early April last year.

It also took to more than 560,000 contracts the reduction in the net long from a high of approaching 800,000 contracts five weeks before.

Trumpflation trade

The reduction comes amid mounting despair at a trade on expectations of higher inflation, meaning growing commodity prices, which had been based in part on ideas that the election of Donald Trump as US president would mean a raft of measures to boost the country's economic growth.

Speculators' net long in Chicago grains, Mar 21 (change on week)

Soybeans: 65,669, (-32,685)

Soymeal: 59,334, (-610)

Kansas wheat: 15,199 (-10,031)

Soyoil: -25,165, (-25,949)

Corn: -81,691, (-58,089)

Chicago wheat: -121,005, (-20,376)

Sources: Agrimoney.com, CFTC

However, the difficulties that President Trump has had in imposing his agenda, meeting resistance from both courts and politicians, has undermined ideas over a US economic kickstart, at least for now.

Commodity prices, as measured by the Bcom index, have retreated nearly 6% from a high reached soon after Mr Trump's inauguration, in January.

Hopes for the so-called "Trumpflation trade" took a further knock late on Friday, when Mr Trump, in lacking sufficient political support, shelved plans to reform the so-called "Obamacare" health plans introduced by his predecessor Barack Obama.

'Trump failed again'

"Trump failed again," said London broker Marex Spectron, flagging the increasing doubts over the president's tax-cutting agenda which has been at the heart of raised inflation expectations.

Speculators' net longs in New York softs, Mar 21, (change on week)

Cotton: 105,608, (unchanged)

Raw sugar: 67,037, (-23,466)

Arabica coffee: 6,926, (+1,534)

Cocoa: -25,234, (+6,437)

Sources: Agrimoney.com, CFTC

"Tax reform is to come next but he may face similar issues," Marex said, adding that these "reforms have been the rationale for the Trumpflation trade".

"Demand should grow from the increase in wealth/spending from major projects and job creation."

Oil, dollar factors

The comments were echoed by Commerzbank, which said that "after the failed attempt" by the president over healthcare reforms "market participants appear to be sceptical about whether Mr Trump will be able to realise the infrastructural plans he announced so grandly.

Speculators' net longs in Chicago livestock, Mar 21, (change on week)

Live cattle: 108,540, (+8,686)

Lean hogs: 45,957, (-1,350)

Feeder cattle: 12,067, (+4,506)

Sources: Agrimoney.com, CFTC

"These have been greatly anticipated ever since the election at the beginning of November, so we believe there is corresponding potential for disappointment among market participants."

Ag advisory group Water Street Solutions noted that record crude supplies have weighed on oil prices, a key influence on broader commodity prices, although "the lower dollar has helped to add some stability".

Weakness in the dollar, which on Monday hit a four-month low against a basket of currencies, improves the affordability of dollar-denominated assets such as many raw materials.

'Large adjustment'

In agricultural commodities, hedge fund selling has been particularly prevalent in grains, including the soy complex, in which managed money returned to a net short of 88,289 lots in the latest week after a selldown of more than 250,000 contracts in a fortnight.

In Chicago soyoil, prices of which soared late in February on rumours of reforms Mr Trump was considering for biofuels, speculators built a net short of 25,165 lots, the biggest in more than two years.

In futures and options in Chicago soybeans themselves, hedge funds cut their net long by 32,685 lots, the biggest selldown in nearly six months, while in corn opening up a net short of 81,691 lots.

That represented a swing net short in positioning of more than 160,000 lots over two weeks even as the prospect looms on Friday of US Department of Agriculture reports on US sowings and grain stocks briefings which both have a record of causing large swings in grain prices.

Last year, the March 31 reports sent corn futures plunging more than 4%.

Broker Benson Quinn Commodities, flagging the "large adjustment" in speculative position on corn, said that "with this much fund liquidation, a bullish Prospective Plantings Report could be interesting", potentially spurring a spike upwards in prices.

Turning sour on sugar

In the main New York-traded soft commodities, hedge funds cut their net long to 154,337 lots, the lowest in a year, although selling was focused on raw sugar, in which the net long is now down by nearly 100,000 lots over four weeks.

Managed money net long in top 13 US-traded ags and (change on week)

Mar 21: 233,242, (-151,393)

Mar 14: 384,635, (-232,217)

Mar 7: 616,852, (-51,236)

Feb 28: 668,088, (-122,900)

Feb 14: 796,016, (+118,149)

Feb 7: 677,867, (+30,597)

Sources: Agrimoney.com, CFTC

"An acceleration in Brazilian mill operations, plus uncertainty over Indian imports and global consumption, assisted the sell-off," said Rabobank.

Softness in oil prices, in undermining values of ethanol, which competes with sugar for cane in the likes of Brazil, besides negative chart signals have also been cited as fuelling selling in the sweetener.

By contrast, in cocoa, in which futures have rebounded - in line with ideas from a number of commentators that a selldown driving futures to an eight-year low last monthy had gone too far speculators cut their net short position by more than 6,000 lots.

That was the biggest swing bullish in positioning in cocoa in seven months.

Bullish on cattle

Chicago livestock futures escaped selling overall, with cattle futures gaining support from a food safety scandal which has prompted many imports to restrict meat imports from Brazil, a major rival to the US in beef exports.

"US cattle futures saw hikes in speculative longs as Brazilian meat import bans made headlines," Rabobank said.

Water Street Solutions said that "expectation for better than expected US exports should add support for the beef market", adding that firmness in the cash cattle market was also providing a prop to futures, which "continue to trade at a discount".

In fact, China, Egypt, two key Brazilian meat export markets, at the weekend lifted curbs on imports from the South American country.

"Brazil has had a couple of wins over the weekend," said Tobin Gorey at Commonwealth Bank of Australia.

Agrimoney LIVE will be covering the impact of recent political events on the agricultural markets, find out more at agrimoneylive.com

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