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Hedge funds win battle in sugar, but slow on wheat

Hedge funds extended their net long in raw sugar, winning a battle with merchants and helping prices sharply higher, but have been slow to react to deterioration in the wheat market, maintaining a large net long position in Chicago.

Managed money, a proxy for speculators, raised its net long position in New York raw sugar futures and options by nearly 14,000 contracts in the week to last Tuesday, May 13, according to data from the Commodity Futures Trading Commission regulator.

The increase took the total net long above 135,000 contracts for the first time in six months, and helped drive sugar prices sharply higher, particularly on May 13 itself, when prices jumped 2.9%, lifted by waning expectations for supplies, and indeed data showing a slow start to the cane crushing season in Brazil.

Platts Kingsman on Tuesday ditched ideas of a world sugar surplus of 2.1m tonnes in 2014-15, instead forecasting a 239,000-tonne deficit, while the International Sugar Organization highlighted an end to the "surplus phase" in world sugar output, heralding a switch to a "deficit phase".

Furthermore, Unica, the cane industry group, revealed a slow April for cane harvesting and sugar output in Brazil's Centre South region, responsible for some 90% of sugar output in the world's top producing country for the sweetener.

Hedge funds vs the trade

The bullish factors helped hedge funds overcome negative sentiment held within the trade, which has maintained a short position in sugar derivatives, Marex Spectron said.

Speculators' net longs in New York softs, May 13, (change on week)

Raw sugar: 135,016, (+13,941)

Cotton: 57,044, (-7,334)

Cocoa: 47,586, (-6,525)

Arabica coffee: 39,762, (-1,789)

Sources: Agrimoney.com, CFTC

"The trade were short, partly in anticipation of profiting when the funds, as they always have for the past year or so, lost patience and sold," the broker said.

"That hasn't happened this time, at least not yet."

Marex highlighted in particular the Unica data, which brought home "just how potentially bullish" the Centre South situation could prove, given farmers' reluctance to fork out for fertilizers, given low sugar prices for much of the last year, and poor mill finances.

There is the prospect of an El Nino weather pattern, which typically brings high rainfall to the region, slowing cane harvesting and depressing sugar levels within the crop .

"Funds are beginning to get the impression that sugar has the makings of a 'bullish story'," Marex said.

'Cast a long shadow'

However, managed money proved downbeat on agricultural commodities as a whole in the week to May 13, cutting their net long position in futures and options in the top 13 US-traded contracts, from cotton to cattle, by nearly 29,000 contracts, the CFTC data showed.

Speculators' net longs in Chicago livestock, May 13 (change on week)

Live cattle: 131,548, (-4,935)

Lean hogs: 63,522, (-4,428)

Feeder cattle: 15,150, (+798)

Sources: Agrimoney.com, CFTC

This reflected in part a decline in bullish sentiment towards livestock, with net long positions - the extent to which long holdings, which profit when values rise, exceed short bets, which benefit when prices fall declining in both lean hogs and live cattle.

Cattle values have been undermined by some softness in cash markets, while high animal weights have reduced pork supply fears caused by growing losses to the North American outbreak of porcine epidemic diahorrea virus (PEDv).

But hedge funds also sold down in cocoa, reflecting improved production hopes for West Africa, and cotton, after the US Department of Agriculture, in its first full estimates for 2014-15, forecast world stocks of the fibre growing to 101.7m bales by the end of the season.

"This number is twice what was seen in the 2010 and will continue to cast a long shadow over the market," said Sterling Smith at Citigroup.

Slow to sell wheat

And in Chicago corn, hedge funds cut their estimate for the net long by 11,000 contracts, after the USDA forecast a record domestic harvest this year leading the world to an all-time production high too.

Speculators' net longs in grains and oilseeds, May 13, (change on week)

Chicago corn: 255,044, (-11,435)

Chicago soybeans: 131,763, (-6,281)

Chicago soymeal: 72,061, (+6,433)

Chicago wheat: 45,307, (+42)

Kansas wheat: 34,523, (-2,353)

Chicago soyoil: 18,080, (-5,086)

Sources: Agrimoney.com, CFTC

Bullish sentiment on the grain has also been eroded by a recovery in US planting progress, after a slow start.

However, hedge funds extended their net long position in Chicago wheat week on week, albeit by a modest 42 contracts, to 45,307 lots, the highest in 18 months.

Prices of the grain had been supported by drought in the southern Plains, and excessive rains in the north which slowed spring plantings although both concerns have now eroded somewhat, fuelling a decline in prices which continued today, putting Chicago futures on course for a ninth successive negative close.

Futures have so far lost 9% during this decline.

"One would expect that net long positions were reduced over the balance of last week," said Jonathan Watters at Benson Quinn Commodities.

Hedge funds did cut their net long in Kansas City hard red winter wheat, the type under threat from US southern Plains drought, which has fallen nearly 10% over the same period.

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