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Hedge funds wrong-footed as real's rally spurs ag price revival

Hedge funds, which have seen short bets in commodity markets such as energy come unstuck, have been wrong-footed in agricultural derivatives too ratcheting up a record net short ahead of a rally fuelled by a resurgent real.

Managed money, a proxy for speculators, hiked by more than 120,000 contracts its net long position in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.

The increase in the net short - the extent to which short positions, which benefit when prices fall, outnumber long bets, which profit when values rise - took it to 317,921 contracts, by far the highest on records going back to 2006.

Ags vs the rest

Agriculture has represented a relatively safe short bet for speculators, given the ample supplies of many crops which - combined with the impact of a strong dollar, making dollar-denominated exports less affordable have weighed on prices.

Speculators' net longs in grains and oilseeds, Mar 1 (change on week)

Chicago soyoil: 41,561, (-8,927)

Kansas wheat: -27,783, (-620)

Chicago soymeal: -48,719, (-1,977)

Chicago soybeans: -81,458, (-59,399)

Chicago wheat: -107,680, (-14,313)

Chicago corn: -203,837, (-69,503)

Sources:, CFTC
Futures in the likes of wheat and cotton have set multi-year lows.

Indeed, agriculture "is one of the few commodity sectors on which asset managers have become more bearish this year", Barclays noted in a report last week, flagging that funds have cut exposure to falls in the prices of the likes of energy and gold.

A jump in mining shares this year, on the back of recovering commodity prices, has left many hedge funds nursing losses or at least, curtailed the gains made on last year's collapse in values.

Shares in Glencore, in which Lansdowne Partners is short of 227m shares, and Anglo American, in which Odey Asset Management has a large short position according to the Financial Times, have near-doubled since the start of the year.

'A big plus'

However, the rise in the agriculture net short to a record high came ahead of a start to March which has been positive for futures - thanks largely to a surge in the Brazilian real spurred by hopes that the arrest of former president Lula da Silva over allegations of kickbacks will end up bringing in a market-friendly government.

Speculators' net longs in New York softs, Mar 1 (change on week)

Raw sugar: 41,018, (+32,932)

Cocoa: 21,634, (+3,176)

Cotton: -3,326, (-548)

Arabica coffee: -19,363, (-8,911)

Sources:, CFTC
The real soared 6% last week against the dollar, boosting the value, in dollar terms, of assets such as coffee, corn, soybeans and sugar in which Brazil is a major player.

For assets such as corn and soybeans, in which Brazil is also key export competitor to the US, the hope of a switch in import demand have added an extra dimension to hopes for Chicago bulls, who have been disappointed by the weak pace of US grain and soybean exports.

In corn, for instance, Tobin Gorey at Commonwealth Bank of Australia said that the "current strength in the Brazilian real is a big plus for the [Chicago] corn market. 

"A stronger real will help to move heavy US corn inventories from origin."

Price rebounds

May corn futures have risen 1.6% in Chicago since last Tuesday, when the CFTC data were taken.

Speculators' net longs in Chicago livestock, Mar 1, (change on week)

Lean hogs: 44,632, (+618)

Live cattle:22,155, (+5,993)

Feeder cattle: 3,042, (+1,470)

Sources:, CFTC
Soybean futures have gained 3%, crossing back above their 10-day, 20-day, 40-day, 50-day and 100-day moving averages, and implying that most short bets entered since around Thanksgiving are under water.

Chicago wheat futures have gained 4.4%, boosted by concerns over dryness on the US Plains, the main winter wheat-growing area, mainly of hard wheat.

Indeed, Kansas City-traded hard red winter wheat futures have fared even better, gaining 5.7%.

'Offer support to prices'

Upward pressure on prices is seen being fuelled by the extent of hedge fund shorts, with extreme holdings often encouraging speculators to reverse positions, for fear that such a one-way bet has become "overcrowded".

In corn, for instance, the managed money net short position rose in the latest week by nearly 70,000 lots, an unusually large shift negative, to 203,837 contracts, the biggest on records going back to 2006.

"This is complimented by a record net short position in the wheat and soybean pits," said Benson Quinn Commodities, adding that the data "will offer support" to prices short-term.

In soybeans, hedge funds raised their net short by nearly 60,000 contracts - the biggest one-week swing bearish in positioning on record to a nine-month high.

In Kansas City-traded wheat, the net short hit a record high of 27,783 lots, with the net short in Chicago soft red winter wheat futures and options, at 107,477 contracts, some 4,000 lots shy of the record set in May last year.

Softs harden

The price recovery has been evident in some soft commodities too, with New York-traded arabica coffee and raw sugar futures up more 3% since last Tuesday, helped by the reviving real.

In arabica coffee, the real's revival struck at a time when managed money had lifted their net short to a historically high, although not unprecedented, 19,363 lots.

Speculators had already started rebuilding a net long position in raw sugar futures and options, after slashing it by more than 90% in the previous three months, but with their revived bullishness helping prices rise by 3.5% in the week to last Tuesday.

"Adverse weather during the harvest period continues to constrain output in Thailand and India," Rabobank noted.

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