PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 11:45 UK, 10th Apr 2017, by Mike Verdin
Hedge funds turn net bearish on ags - spurring hopes for price spikes

Hedge funds' renewed pessimism over ag commodity prices took them net bearish on the sector for the first time in more than a year – raising ideas they may be vulnerable to losses should hiccups beset the spring sowings season.

Managed money, a proxy for speculators, in the week to last Tuesday opened up a net short position of 29,419 contracts in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, analysis of data from the Commodity Futures Trading Commission regulator shows.

The swing reflected a net selldown of nearly 100,000 contracts – a seventh successive week when sales have exceeded purchases, matching the longest such streak since autumn 2015.

The switch reflected in particular a rise in short bets, which profit when values fall, which topped 1.1m lots for the first time since June 2015.

Out of fashion

The selling reflects the extent of the gloom over forecasts for agricultural commodity prices, amid ideas of ample world supplies - which are expected to be underlined on Tuesday when the US Department of Agriculture unveils its latest Wasde report seen raising estimates for both domestic and world inventories of corn, soybeans and wheat.

Speculators' net long in Chicago grains, Apr 4 (change on week)

Soymeal: 13,942, (-15,591)

Soybeans: 722 (-37,194)

Kansas wheat: -7,593 (-5,837)

Soyoil: -38,796, (-19,048)

Chicago wheat: -138,834, (-2,684)

Corn: -150,287, (+5,225)

Sources: Agrimoney.com, CFTC

The selldown also extends a reversal of the so-called "Trumpflation trade" evident early in 2017, amid expectations that US President Donald Trump would introduce economic stimulus measures which would also spur rising prices of assets such as commodities – ideas which have now cooled.

However, the ag selling is somewhat unusual in that is it being led by bearish positioning on grains at a time when investors are often - as the northern hemisphere spring sowings season ramps up- injecting risk premium into prices to account for the risk of weather upsets to plantings.

Last April, for instance, speculators were amidst a substantial short-covering wave.

'Best rally opportunity'

Surprise at the extent of fund gloom was aimed in particular at corn, for the which USDA has already forecast a large drop in US sowings this year.

Speculators' net longs in New York softs, Apr 4, (change on week)

Cotton: 94,729, (-10,713)

Raw sugar: 43,381, (-13,036)

Arabica coffee: -1,846, (-254)

Cocoa: -15,802, (+2,389)

Sources: Agrimoney.com, CFTC

"Having a short position going into planting could result in fund short-covering," said Minneapolis-based broker Benson Quinn Commodities.

Ag advisory group Water Street Solutions said: "Funds are huge shorts going into the US growing season and should provide the best rally opportunity."

At Chicago-based broker RJ O'Brien, Richard Feltes said that "the large managed fund short worrisome, if planting delays emerge".

Market divergence

US corn sowings will come into particular focus later on Monday when the USDA unveils its first reading for 2017 on progress in plantings so far this year – amid a wide range of estimates.

Speculators' net longs in Chicago livestock, Apr 4, (change on week)

Live cattle: 121,026, (+1,644)

Lean hogs: 32,386, (-6,128)

Feeder cattle: 17,533, (+1,547)

Sources: Agrimoney.com, CFTC

According to Mr Feltes, the data should show sowing completion "in the 6-7% area, versus 4% average" progress for the time of year.

However, according to Joe Lardy at CHS Hedging, "the expectation is that 1-2% [of corn] is in" the ground.

"The weather just hasn't been exceptional to have a really fast start," with wetness slowing fieldwork.

Expectations differ too over whether rainfall this week will prove sufficient to disrupt key Midwest sowings, with Commodity Weather Group forecasting that rains will "favour the north west Midwest" this week,  with the rest of the region seeing "only scattered showers",

MDA, however, has forecast that "showers in western and central [Midwest} areas will slow corn planting" this week.

'Look for spring rallies'

Water Street Solutions flagged potential for weather upsets to provoke a rally too in soybeans, in which hedge funds have cut their net long to 722 lots, from a figure of more than 176,000 lots reached during the early-year commodities buying spree.

"Funds are now essentially flat in their soybean position after weeks of shedding their ownership as the fundamentals continue to tip bearish," the group said

However, while "South American estimates continue to grow week after week… at some point, all the bearish information is built in to price.

"Global oilseed demand is large and growing. Look for spring rallies," which would represent "pricing opportunities" for producers.

'Risk of further liquidation'

However, some commentators found less cause for optimism over a potential rally in one spring-seeded crop, cotton, in which speculators have already built a substantial net long position – albeit one which fell sharply in the latest week.

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

Apr 4: -29,419, (-99,680)

Mar 28: 70,261, (-162,981)

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

Louise Rose at the Rose Commodity Group noted: "Managed money firms significantly reduced their long futures position," to some 95,000 lots, the equivalent of about 9.5m bales.

At Commonwealth Bank of Australia, Tobin Gorey said: "The positions report, as expected, showed that investors had sold off a chunk of their long positions in the week to last Tuesday. 

"And they have likely done more since," with New York cotton futures dropping 5.0% last week, which they ended at their weakest since January.

"The position, though, remains very large so the market is still at risk of further liquidation," Mr Gorey added.

'Record supplies will weigh'

Also among soft commodities, hedge funds cut their net long in New York-traded raw sugar futures and options for a sixth successive streak, matching their longest selldown in the commodity since summer 2014.

And speculators turned net sellers in Chicago-traded livestock too, reflecting a cut in their net long in lean hog futures and options to the lowest in four months.

Water Street Solutions noted that, after a US herd increase, "the cash [hog] market continues to soften and record supplies will likely weigh on the market going forward.

However, the group added: "The good news is the good export pace," with official data last week showing US pork shipments up 15% in February at 197,025 tonnes.

"Carcass weights continue to trend below 2015 and 2016."

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