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Hedge funds near-record short on ags - spurring hopes for 'powerful rally'

Hedge fund bets on falling agricultural commodities are at their second largest on record, with bearish position on grains actually at an all-time high – strengthening ideas that prices could be poised for a sharp rebound.

Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 89,453 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The increase in the net short –the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – took it to 244,606 contracts, a level exceeded once on records going back to 2006.

The shift reflected in part a cut of nearly 25,000 in bullish positioning on New York-traded soft commodities, such as cocoa and coffee.

While hedge funds retain a net long in softs, the position, at 17,798 contracts, is at its lowest level in 20 months.

However, bearish betting was led by grains, including the soy complex, in which managed money raised its net short by more than 73,000 lots to 467,643 contracts - the largest on records going back 11 years.

'Leaning too short'

The extent of the bearish bets - at a time when grain prices are already weak by levels of recent years, and when weather worries have ticked higher in the likes of North America, China and Ukraine – raised questions among some commentators that it might herald strong price gains, if speculators are provoked to cover short bets.

Speculators' net long in Chicago grains, May 30 (change on week)

Kansas wheat: 3,221 (+1,055)

Soyoil: -22,313, (-13,692)

Soymeal: -44,500, (-9,039)

Soybeans: -89,310 (-26,955)

Chicago wheat: -113,760, (-549)

Corn: -200,981, (-24,478)

Sources: Agrimoney.com, CFTC

While short bets in Chicago soft red winter wheat, the global bellwether, are not uncommon at this time of year, as the ramping up of the US harvest produces a jump in supplies and weighs on values, Benson Quinn Commodities said that speculators "may be leaning too short".

Midwest wetness, which hampered corn sowings, has slowed early winter wheat reaping too, with US Wheat Associates reporting on Friday that a "majority of locations have not started harvesting due to wet conditions".

While the harvest of hard red winter wheat, as grown in the southern Plains, is further ahead, early reports have not proved so encouraging, with US Wheat Associates cautioning that "a high percentage of wheat acres in south west Oklahoma extending southward into central Texas have been swathed for hay, or otherwise abandoned, in favour of planting cotton".

At broker CHS Hedging, Joe Lardy said that "early harvest results for hard red winter wheat look to be disappointing for protein. Last year was really low at only 11.2% but this year's early cuttings are only coming in around 10.5%".

Ag advisory group Water Street Solutions said that winter wheat futures "should have a $0.50-a-bushel rally in them", noting too the dryness which has sent Minneapolis spring wheat futures close to near-two-year highs.

'Largest surprise'

However, the increase in the net short in grains in the latest week was led by corn and soybeans – despite the disappointing start that US Midwest crops have got off too, thanks to cold and wet weather.

Speculators' net longs in New York softs, May 30, (change on week)

Cotton: 86,685, (-9,129)

Raw sugar: -22,116, (-13,398)

Arabica coffee: -18,378, (-2,544)

Cocoa: -28,393, (+402)

Sources: Agrimoney.com, CFTC

On soybeans, Benson Quinn Commodities asked whether "with market tumbling this week to 14-month lows, weather and [resilient] export demand… will funds want to continue adding to short positions at these levels?

"What is the risk/reward of new short positions at 14-month lows?"

On corn, the extent of the net short position, which Terry Reilly at Futures International termed the "largest surprise" in the CFTC data, prompted Benson Quinn Commodities to propose that "the funds are leaning too short at this point.

  "Without some type of improvement" in US corn crop ratings, in a report released later on Monday by the US Department of Agriculture, "I expect the funds to have to cover some shorts", Benson Quinn Commodities said, adding that the CFTC data provided a "supportive tilt to the corn market".

'Powerful rally' ahead?

Water Street Solution said that the "large fund short position in grains is a supportive factor entering the growing season".

Speculators' net longs in Chicago livestock, May 30, (change on week)

Live cattle: 131,946, (+1,260)

Lean hogs: 56,763, (+8,013)

Feeder cattle: 16,530, (-309)

Sources: Agrimoney.com, CFTC

And Bcom, the Bloomberg commodity index, said that short-covering encouraged by US weather setbacks could see grains lead a revival in the commodity complex overall.

"Energy stabilising, the US dollar peaking and improving global PMIs [purchasing management indexes] indicate the commodity market is ripe for recovery, highly subject to summer weather in Illinois.

"The key broad commodity driver this summer should be grains -- they could continue drifting lower or risk a powerful rally.

"Record US exports of grains, meat and natural gas on the back of near-record net grain shorts should heat up broad commodity returns if the summer sizzles a bit more than expected."

Bcom added that grain prices, after "plunging" since 2012, "appeared to have reached an inflection point.

"Just a few hot and dry weeks in the US Corn Belt in July-August could have an oversized bullish impact, notably due to near-record net short managed-money grain positions."

'Ripe to sweeten'

Among soft commodities, Bcom was upbeat over prospects for sugar prices too, now that the market was "expunged" of the large net long position which it carried for the year to March, with speculators now holding a net short holding.

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

May 30: -244,606, (-89,453)

May 23: -155,153, (+7,988)

May 16: -163,141, (-8,947)

May 9: -154,194, (+35,047)

May 2: -189,241, (+41,965)

Apr 25: -231,206, (-68,232)

Apr 18: -162,974, (-50,324)

Apr 11: -112,650, (-83,231)

Sources: Agrimoney.com, CFTC

"Sugar is ripe to sweeten," Bcom said, noting a fall in prices, which set a 15-month low in the last session, at a time when "global stocks-to-use estimates are trending down", a factor also highlighted last week by the International Sugar Organization and by producer Biosev.

However, at Commonwealth Bank of Australia, Tobin Gorey was less upbeat over prospects for cotton, in which hedge funds cut their net long by more than 9,000 lots in the latest week.

"Those investors still have plenty more they can sell," he said flagging that price "momentum, neutral since March, is gathering to the downside".

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