Funds are likely to be forced into a round of short-covering
in grains, putting further upward pressure on futures, after being caught out again by
betting on lower prices just ahead of bullish news.
Managed money, a proxy for speculators, cut its net short
position in futures and options in the top 13 US-traded agricultural
commodities, from arabica coffee to live cattle, by 132,124 contracts in the
week to last Tuesday, analysis of data from the Commodity Futures Trading
Commission regulator shows.
The cut in the net short position (the extent to which short
holdings, which profit when values fall, exceed long bets, which benefit when
prices gain) reflected bearish positioning in all three complexes - grains,
livestock and soft commodities.
However, in corn and soybeans in particular, funds' bearish
betting has appeared misplaced, raising the potential for short positions to be
closed, putting yet further upward pressure on prices.
'Sold too many
In soybeans, managed money extended its net short position
in Chicago futures and options to more than 118,000 contracts in the latest
week – the highest figure on records going back to 2006.
However, the latest short bets have been left well out of
the money by a rise in prices spurred by worries over hot Midwest weather, provoking
concerns for US yields, and by US Department of Agriculture data on Friday
showing domestic sowings of the crop this year at a level well below market
US soybean inventories as of June 1 also fell below
forecasts, spurring ideas of stronger-than-expected consumption.
Indeed, the data imply a US soybean carryout for 2016-17 "of
400m bushels versus the USDA's current 450m-bushel estimate", said broker
Benson Quinn Commodities.
Finds "sold too many soybeans", Benson Quinn Commodities
said, adding that the "record fund short will bring follow-through buying" in
Soybean futures for August have risen by more than 5% since
Tuesday, when the data were taken.
The broker added that hedge funds had "sold too many" corn
contracts too, in driving their net short up by more than 50,000 lots to back
above 106,000 contracts – again preceding a market rally.
Corn futures for September are up more than 6% since last
Tuesday, pulled higher by worries over Midwest weather, and gains in rival grain
wheat, which helped them overcome some ostensibly bearish data in Friday's USDA
"The funds entered the report with large short position, and
will likely need to cover this coming week," Water Street Solutions said,
flagging forecasts of "above-average temperatures for July, especially for the
western Corn Belt.
"Funds are facing a short-covering situation and a less than
perfect weather outlook should continue to give upside opportunities," the ag
advisory group said, noting $4.10-4.50 a bushel as the "upside target" price
for corn futures, a levels not seen for a year in Chicago on a spot contract
'Still had plenty to
In wheat, speculators proved more profitably positioned in
raising their net long position in Kansas City-traded hard red winter wheat to
the highest in three years, as futures accelerated to, on Monday, their highest
level in nearly two years.
In Chicago soft red winter wheat, also at a near-two-year
high, hedge funds at least managed to trim their longstanding net short bet,
although Tobin Gorey at Commonwealth Bank of Australia said that "investors still
had substantial short positions last Tuesday".
"Investors thus still had plenty to buy still late last week,"
he said, adding that Chicago wheat futures were also likely be boosted by the entry
of momentum investors into the contract, besides by spillover from the surge in
futures in drought-hit US spring wheat, as traded in the lower-profile
Mr Gorey said: "Investors like liquidity. Minneapolis, being
a small market, offers modest liquidity. Investors will choose not to trade, or
might even be prohibited, from trading that market.
"The action naturally tends to spill into other, correlated,
markets," with Chicago the most liquid world wheat market.
Record cool on coffee
In soft commodities, many hedge funds were caught out in sugar
too, raising their net short to 113,484 lots, the second highest on record,
just ahead of a bounce in prices.
In arabica coffee, a rise in the net short to an all-time
high of 43.619 lots appears more comfortably placed, with prices recovering
only marginally since last Tuesday.
In cotton, managed money cut its net short to 13-month low of
31,410 lots, in a sixth successive week of bearish positioning in the fibre,
the longest such run in nearly two years, amid strong expectations of US
production this year.
Still, such ideas took a backwards step on Friday, when the USDA,
spurring a recovery in futures, reduced its estimate of domestic sowings this
year rather than raising it as the market had expected.