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Hedge funds, wrong-footed by grains rally, 'swallow losses'

Hedge funds slashed their bearish bets on agricultural commodities, appearing to swallow hefty losses, as dryness fears for grain crops boosted prices and wrong-footed speculators.

Managed money, a proxy for speculators, cut its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 176,502 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 – disguised an astonishing divergence in sentiment towards grains and New York-traded soft commodities.

While in soft commodities, hedge funds extended their net short position to the highest in more than two years, in grains, including the soy complex, they chopped their net short position by more than 200,000 lots for only the second time on data going back to 2006.

Prices recover

The short-covering came against a backdrop of rising prices, amid growing concerns over dryness hurting threatening wheat yields in Australia, the European Union, Ukraine and the US, while undermining hopes too for US corn yield potential.

Speculators' net long in Chicago grains, June 13 (change on week)

Kansas wheat: 23,888 (+21,494)

Soyoil: -16,840, (+17,461)

Corn: -17,929, (+120,829)

Soymeal: -44,746, (+6,195)

Soybeans: -79,673 (+15,064)

Chicago wheat: -82,859, (+23,277)

Sources: Agrimoney.com, CFTC

And the position-closing appears to have spelled losses for many hedge funds, which had built their short bets in grains over April and May amid expectations at the time of another benign year of grain-growing weather, spelling further rounds of price falls.

However, with July Chicago corn futures during the week hitting their highest since February, and staying well above mean levels as indicated by major moving average lines, the short-closing would appear to have spelled heavy losses.

In wheat, holders of longer-term short positions may have been able to walk away with some profit, but not those having taken out bearish bets within the last month.

'A lot of people sore'

"There are a lot of people sore out there, because of the losses," a US grain investor told Agrimoney.com.

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

Cotton: 68,915, (-11,012)

Cocoa: -26,719, (+1,216)

Arabica coffee: -30,987, (-3,577)

Raw sugar: -70,666, (-18,182)

Sources: Agrimoney.com, CFTC

"But it was always going to be a risk, unnecessary in my view, going short when prices were already low, and when the spring and summer are approaching, when markets become more susceptible to weather threats.

"The question now is what happens to the rest of the shorts. Do they get out now, or hold on and risk even bigger losses?"

'Negative for prices'

In fact, there is some idea that the extent of the short-covering that has already taken place could weigh on prices, at least short-term, in indicating that much ammunition for upward pressure on values from this dynamic has already been fired.

In corn, if the funds now "have a very manageable net short, which they do, and rains keep interrupting the drought in the Corn Belt, it would seem holding these values is going to be tough to do," said broker Benson Quinn Commodities, terming the market structure "negative" for futures for now.

Further support from fund strategy would require them being willing to build a substantial net long position.

'Leaning too long'

Water Street Solutions proposed that this could be possible, saying that "while funds have been able to exit a majority of their short position, continued warm/dry uncertainty for the Midwest July as well as European weather concerns could move them into long buyers".

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

Live cattle: 132,551, (+2,764)

Lean hogs: 64,603, (+1,177)

Feeder cattle: 17,164, (-204)

Sources: Agrimoney.com, CFTC

However, Benson Quinn Commodities said that "despite some concerns about the weather going forward, I would be surprised to see them build a long until something more tangible on the supply side develops".

The broker was also dubious over the potential for a further shift positive on hedge fund bets on wheat, saying that while it "can't rule out additional short covering in Chicago… given the technical momentum", speculators were "leaning too long" in Kansas City-traded hard red winter wheat.

Managed money raised its net long in hard red winter wheat futures and options by a record 21,494 lots in the latest week.

The Minneapolis spring wheat market, meanwhile, was termed "overbought and due for a correction.

"Regardless of what may have to happen later, I can't blame the trade if they don't want to pay $6.50 a bushel for spring wheat at this point."

Coffee, sugar out of favour

In soft commodities, the further increase in the net short position reflected largely, again, further bets on falling sugar prices.

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

Jun 13: -63,298, (+176,502)

Jun 6: -239,800, (+4,808)

May 30: -244,606, (-89,453)

May 23: -155,153, (+7,988)

May 16: -163,141, (-8,947)

May 9: -154,194, (+35,047)

May 2: -189,241, (+41,965)

Apr 25: -231,206, (-68,232)

Sources: Agrimoney.com, CFTC

Indeed, hedge funds are well in the money on the sweetener, having built up their largest net short position in two years, at a time when prices have fallen to 15-month lows, undermined by bigger-than-expected Brazilian output and a drop in the country's fuel prices which, via ethanol, feeds through into sugar values.

Meanwhile, speculators raised their bearish bets on arabica coffee futures and options to a record high of 30,987 lots, helped by ideas of decent Brazilian production, at a time when importing nations already have large stockpiles to draw down.

In cotton, speculators cut their net long position by more than 11,000 lots to a seven-month low of 68,915 contracts, amid increasing confidence in a decent US harvest this year.

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