PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 13:48 UK, 6th Feb 2017, by Mike Verdin
Hedge funds slash bullish ag bets - even as history 'suggests rally ahead'

Hedge funds slashed bullish bets on agricultural commodities, turning record bearish on cocoa and selling grains heavily – in a trend deemed supportive to prices, which some analysis says may be heading for a long-term recovery.

Managed money, a proxy for speculators, slashed its net long position in futures and options in the top 13 US-traded agricultural commodities, from wheat to sugar, by 90,364 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The reduction in the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – was the first of 2017, and reflected primarily a sell-down in grains, of which hedge funds turned more bearish on all the main contracts.

Other notable targets for selling included cocoa, in which hedge funds slashed their net long position by nearly 6,000 lots to 22,406 contracts, the highest on data going back to 2006, and beating the previous record high set six years ago.

Rabobank noted that "the weather continues to be favourable in West Africa," the world's top cocoa-producing area.

The bank also flagged a boost to supply ideas from a cut late last month by International Cocoa Organization officials to 13,000 tonnes, from 150,000 tonnes, in their estimate for the world cocoa production shortfall in 2015-16.

'Should be supportive'

However, the extent of the selling raised some ideas that hedge funds may have gone too far, creating extra scope for speculators to take up fresh long positions.

Speculators' net long in Chicago grains, Jan 31 (change on week)

Soybeans: 152,852, (-23,558)

Soyoil: 66,975, (-28,930)

Soymeal: 66,014, (-2,371)

Kansas wheat: 17,613 (-10,281)

Corn: 3,461, (-17,437)

Chicago wheat: -99,087, (-10,388)

Sources:, CFTC

Indeed, broker Allendale, assessing a strong start to Monday for Chicago futures, cited "money flows back into the soy complex after [CFTC data] showed an increase in short positions", at a time when China, the top soybean buyer returns to work after the golden week holiday, "providing initial buying bias".

Meanwhile, Benson Quinn Commodities said that the CFTC report "should be supportive to corn and wheat" prices, after showing sizeable selldowns in these contracts too.

In corn, the broker said it "would not rule out fund buying [this week] with supportive news", given the extent of selling.

'Not what we were expecting'

Meanwhile, Tobin Gorey at Commonwealth Bank of Australia expressed surprise at the extent of fund selling in wheat, given the theme of position closing that appeared to have been in train of late, driving prices higher.

Speculators' net longs in New York softs, Jan 31, (change on week)

Raw sugar: 163,732, (-1,399)

Cotton: 93,519, (+6,178)

Arabica coffee: 27,265, (+1,524)

Cocoa: -22,406, (-5,920)

Sources:, CFTC

"The investor short actually increased slightly as of last Tuesday, not consistent with what we were expecting," CBA's Tobin Gorey said.

"Nonetheless, the big [price] gains last week came on Wednesday so this snapshot might simply be too early to capture investors buying back some more of their hefty short."

'Grain prices reaching bottom'

The late-January selling also contrasted with a positive picture for agricultural commodity prices over the month as a whole, with the Bloomberg Commodity Index saying that its grain sub-index rose by 2.3% over the month, with softs recording a 6.5% gain, although livestock dropped 1.3%.

Speculators' net longs in Chicago livestock, Jan 31, (change on week)

Live cattle: 110,074, (+799)

Lean hogs: 58,218, (+2,394)

Feeder cattle: 9,058, (-975)

Sources:, CFTC

While January is "typically a ho-hum down month for the ags", this time "agriculture commodities rallied strongly… in anticipation of a potential non-bumper crop year bucking the extended trend," Bcom said.

Indeed, the index - citing comparison of world demand and output data in corn, soybeans and wheat - drew comparison with 2010, which saw the start of a rally which saw prices double over the next two years.

"The last time the ratio of USDA-estimated global corn, soybean and wheat consumption increased relative to production similar to the present was coincident with the 2010 [price] bottom," Bcom said.

"Typically, higher prices have been necessary to help rebalance such supply/demand disparities.

"If 2010 is a guide, the grains may have a greater propensity to recovery soon. Grains may be reaching bottom."

'Sharply increasing consumption'

Soft commodities, meanwhile, "may be in a similar recovery period as 2010 after bottoming a little over a year earlier and being led higher by flattening futures curves".

"Sharply increasing consumption of sugar, cotton and coffee spurred by declining prices the past few years is running headlong into production declines.

"The softs are leading commodities out of the gates in 2017, and they may just be getting started."

'Problematic for the market'

However, in livestock, data showing a 17.6% surge in December in cattle placed for fattening on US feedlots, implying a surge in beef supplies ahead, has helped dampen sentiment.

The data has "proven to be problematic for the market", ag advisory group Water Street Solutions said.

"The huge placement numbers reminded the trade that the market is not going to run out of cattle."

Tobin Gorey, at Commonwealth Bank of Australia, said that the four-month uptrend in US prices hit a few stumbling blocks last week", with the market "now pausing to re-evaluate its 2017 supply outlook".

After hedge funds slowed their pace of buying in live cattle futures and options to the slowest in an unbroken 12-week run of purchases, it looks like "liquidation has taken place" since the data were taken last Tuesday.

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