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Hedge funds cut short wheat bets - as key test looms of 9-year bear market

Hedge funds returned to raising bullish bets on ags, lifting their net long in cotton above 100,000 contracts for the first time, and buying back wheat - amid a debate over whether a nine-year bear market is at an end.

Managed money, a proxy for speculators, increased its net long position in futures and options in the top 13 US-traded agricultural commodities, from soybeans to sugar, by 30,579 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The increase in the net long– the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – reflected improved sentiment for both the grains, including the soy complex, and soft commodities.

In Chicago-traded livestock, managed money reduced its net long for the first time in three months, ending the longest bullish run in positioning since spring 2014.

Corn, wheat buying

In the grains complex, the increase in bullish positioning was led by corn, in which hedge funds raised their net long to the biggest in seven months, thanks to the biggest week for buying since October.

Speculators' net long in Chicago grains, Feb 7 (change on week)

Soybeans: 150,314, (-2,538)

Soyoil: 62,852, (-4,123)

Soymeal: 60,825, (-5,189)

Corn: 28,833, (+25,372)

Kansas wheat: 17,608 (-5)

Chicago wheat: -82,547, (+16,540)

Sources: Agrimoney.com, CFTC

Chicago corn prices have found support of late from data showing strong demand for US supplies of the grain, both from domestic ethanol plants, which have been running at record production levels, and from importers, with exports, at 1.12m tonnes so far in 2016-17, running 67% above year-ago levels.

However, in wheat, hedge funds lowered their net short position in Chicago futures and options to the lowest since June, amid a debate over the sustainability of a recovery in wheat futures from a 10-year low of $3.59 ˝ a bushel in August.

As of Monday, Chicago soft red winter wheat futures had rebounded 24% from that level, on a spot contract basis, to stand at $4.46 ˝ a bushel for the March lot.

'Break the multi-year bear market'

From a technical perspective, winter wheat futures "are still in their consolidation ranges and waiting for some news to help break the multi-year bear market", said ag advisory group Water Street Solutions, flagging the role of large world supplies in curtailing "market strength".

Speculators' net longs in New York softs, Feb 7, (change on week)

Raw sugar: 174,183, (+10,451)

Cotton: 100,340, (+6,821)

Arabica coffee: 20,090, (-7,175)

Cocoa: -24,320, (-1,914)

Sources: Agrimoney.com, CFTC

Even after their price rebound since August, Chicago futures remain down two-thirds from their record high of $13.34 ˝ a bushel reached in 2008.

However, many investors are pondering whether the extent of the revival in wheat futures – which, March basis, have returned close to their 200-day moving average for the first time since June – means that the bear market is over, especially after the US Department of Agriculture last week cut its estimate for world stocks notably further than investors had expected.

"Traders are wondering if global wheat supplies finally peaked," said Futures International's Terry Reilly, flagging too the drop to the lowest in more than a century in US winter wheat sowings (for the 2017 harvest).

Key price point

Benson Quinn Commodities said that, while "from a technical standpoint, the wheat charts continue to take on a more supportive tone", the big battle for futures was whether they could add a further $0.10 a bushel or so, and break out of the downward price channel stretching back to the 2008 peak.

Speculators' net longs in Chicago livestock, Feb 7, (change on week)

Live cattle: 103,588, (-6,486)

Lean hogs: 58,804, (+586)

Feeder cattle: 7,297, (-1,761)

Sources: Agrimoney.com, CFTC

"The key is whether or not the front month Chicago contract can break through a longer term down trend line in the low $4.50s a bushel," the Minneapolis-based broker said. 

"The significance is that this downtrend line has held on every rally since the 2008 debacle."

"The Chicago market is within cents of putting more pressure on the short position," an outcome which "would result in a better cleansing [of short holdings] and higher values".

Cotton vs cocoa

Among soft commodities, hedge funds raised their net long in New York cotton futures and options to a record high, encouraged by a strong pace of US exports, which are running 69% above year-ago levels – although the extent of fund buying has raised some concerns of an overreaction.

"My worry continues to be that if the market responds positively to strong export sales, the market will find itself faced with too much production in 2017-18 and consumption not able to keep pace," said veteran soft commodities analyst Judith Ganes-Chase.

"With grain markets having been depressed… cotton remains an attractive choice to farmers," she said, speaking ahead of industry data showing that farmers expect to plant an extra 920,000 acres with the fibre this year.

In cocoa however, managed money raised its net short for a 10th successive week – by far the longest on data going back to 2006 – and to a record high of 24,320 lots, amid a dent to market sentiment from the reselling of a slew of Ivory Coast supplies.

Short-selling cocoa has proved a profitable bet, with New York futures for March on Monday touching $1,910 a tonne, down 10.2% so far for 2017, and the lowest on a spot contract basis in five years.

High on the hog

In the livestock sector too, speculators appear well-placed in Chicago-traded lean hogs, nudging higher still their net long in futures and options, to a six-month high, as prices have continued to recover from the 14-year lows reached in October.

"For hogs, every 2017 contract has risen dramatically since last October," Paragon Consulting and Steiner Economics said, with futures more than 80% higher on a spot contract basis.

Values have been supported by firm pork values, propped in term by better-than-expected demand.

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