Morgan Stanley backs commodities, as ags stabilise

Morgan Stanley sounded a bullish note on commodities, even as, in agriculture, regulatory data showed hedge funds curbing negative positioning, with a large cut in bets on falling sugar prices.

Commodities "could see notable performance from here", and "even outperform", if sentiment towards the sector, and its fundamentals improve as expected, the bank said, following a sell-off in many raw materials to multi-month lows.

Many of the factors which have sent commodity prices down 4.4% so far this year, compared with an 8.1% rise in New York shares, are "transitory, and don't diminish the efficacy of commodity investing".

The bank blamed factors from "seasonal demand weakness" to the stronger US dollar, which makes dollar-denominated exports less affordable, and concerns over deflation for the drop in prices, which had been fuelled by an exit of funds from the asset class.

Sugar shorts covered

However, the comments followed regulatory data for the week to April 16 showing that hedge funds had raised their net long exposure to agricultural commodities, after a decline the previous week to the lowest on record.

Speculators' net longs in grains and oilseeds, April 16, (change on week)

Chicago corn: 52,388, (+1,411)

Chicago soybeans: 74,569, (+11,969)

Chicago soymeal: 23,,930, (+7,509)

Kansas wheat: 2,549, (-1,650)

Chicago wheat: -27,178, (-5,084)

Chicago soyoil: -42,341, (+869)

Sources:, CFTC

Managed money, a proxy for speculators, lifted its net long exposure in futures and options in the main 13 US-traded agricultural commodities by more than 45,000 lots, although at 105,576 contracts the figure remains amongst the lowest since records began in 2006.

The shift was driven by a splurge in covering of short positions in New York raw sugar, in which hedge funds had lifted their net short position to a record high the week before, at the start of a Brazilian cane harvest which is expected to drive the world to another sugar production surplus in 2012-13.

In fact, the onset of the cane harvest was delayed by wet weather, although an easing in the rains in the last few days has improved prospects for a cane crop expected to test milling capacity in Brazil's important Centre South region.

More positive positioning

Hedge funds also ended a run from Chicago corn, in which they slashed their net long position by 74% in two weeks, fuelling a slump in prices, after the US Department of Agriculture on March 28 revealed domestic stocks were some 400m bushels larger than analysts had expected.

Speculators' net longs in New York softs, Apr 16, (change on week)

Cotton: 50,445, (-6,672)

Cocoa: 21,128, (+8,063)

Arabica coffee: -23,557, (+3,292)

Raw sugar: -53,324, (+30,016)

Sources:, CFTC

Managed money's net long in corn rose by 1,411 lots in the week to last Tuesday after a drop of more than 140,000 contracts in the previous two weeks.

In the soy complex too, in which a strong US cash market for soybeans and soymeal has attracted investor attention, hedge funds turned to a more positive price outlook too, raising their net long in soymeal for the first time in five weeks.

However, speculators continued to cut their net long position in cotton, for which US sowings prospects have increased with revived prices, as well as in cattle, for which sentiment has been hurt by disappointing demand for beef.

Price outlooks

Morgan Stanley said that cattle prices should in the second half of 2013 benefit from an easing in pressure from concerns over growth in emerging markets, a large support to protein prices, and over disease in China.

Speculators' net longs in Chicago livestock, Apr 16, (change on week)

Live cattle: 24,176, (-1,282)

Lean hogs: +5,787, (+2,820)

Feeder cattle: -2,219 (-1,466)

Sources:, CFTC

Indeed, if China's "spread of bird flu is contained quickly and the knock-on effects on chicken demand remain limited", that could underpin soybean prices too, in fuelling year-on-year growth in Chinese imports of the oilseed to meet animal feed needs.

"This would require additional supply to be brought online in Brazil, where logistical challenges raise the price needed to bring this supply online to over $14 a bushel," the bank said.

For corn, while continuing to forecast a drop in prices in the second half of the year, thanks to a likely rebound in US production, Morgan Stanley highlighted American weather setbacks.

"Acreage is increasingly under threat from flooding in the North and East, while soil moisture has still not returned to normal across the western Corn Belt."

In wheat, "while we expect wheat prices should trade down in the second half of 2013 with corn, the snowpack in the Northern US does pose a risk to planted acreage, which could still tighten up US supply".

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