PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 18:47 UK, 29th Aug 2017, by Mike Verdin
Sugar futures tumble, despite jitters over hedge funds' record bearish bet

Sugar futures fell back from highs reached after weaker-than-expected Brazilian output data, defying nerves that a record hedge fund net short, built up in a big week for selling ags, might inject caution over sales.

Raw sugar futures for October - which gained 2.0% in the last session, helped by industry data showing a pullback in production in Brazil's key Centre South district – gave up early resilience to close down  .4% at 13,82 cents a pound on Tuesday.

Many investors had expected some retreat, viewing the gains of the last session as an overreaction, given the prospect still of a large world sugar production surplus in 2017-18.

"In our view, the data can be better viewed as not as bad as it could have been - and not worth a 2% price gain," said Tobin Gorey at Commonwealth Bank of Australia.

A UK soft commodities trader told Agrimoney.com that the "gains in the last session did not look justified by the Unica data alone", which showed Centre South sugar output in the first half of this month at 3.17m tonnes, down from 3.41m tonnes in the second half of July.

The Unica statistics were, nonetheless, in line with analysts' expectations, as measured by a poll by S&P Global Platts.

'Warning sign to the market'

The trader added that the last session's price gains "look to have been down largely to consideration of the extent of the net short that speculators already have" in New York raw sugar.

Speculators' net longs in New York softs, Aug 22, (change on week)

Cotton: 23,049, (-6,547)

Arabica coffee: -14,341, (-14,626)

Cocoa: -49,089, (-13,559)

Raw sugar: -135,000, (-17,238)

Sources: Agrimoney.comn, CFTC

Data late on Friday showed managed money, a proxy for speculators, raising their net short in raw sugar futures and options by 17,238 in the week to August 22, to 135,000 lots – the largest on records going back to 2006.

Extreme net short bets are seen by many investors as an indication that hedge fund selling pressure may in fact be spent, leaving prices vulnerable to an upward price move.

"The market was aware of the increasing short selling by the speculative community but was perhaps underestimating the extent," said Sucden Financial.

The commodities house added that the data represent "a warning sign to the market, especially in the light of potential weather concerns emerging out of some growing areas in India which have received below average rainfall from the monsoon and where water reserves are at 60% of normal

'Vulnerable to short covering'

CBA's Mr Gorey noting the "hefty short position among investors", said that "buying that position back… would easily account for" recent headway in sugar prices.

It would also suggest that "those gains are not finished, but might also prove fleeting".

Separately, Societe Generale said that the extent of the managed money net short position had left the sugar market "oversold" and "vulnerable to short covering".

Extra shorts

Sugar was in fact only one of the contracts in which speculators hiked bearish bets in the week to last Tuesday, with managed money returning to a net short on the top 13 US-traded agricultural commodity contracts.

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

Aug 22: -80,666, (-178,404)

Aug 15: 97,738, (-173,212)

Aug 8: 270,950, (-68,777)

Aug 1: 339,727, (-20,483)

Jul 25: 360,210, (+29,667)

Jul 18: 330,543, (+27,153)

Jul 11: 303,390, (+330,243)

Sources: Agrimoney.com, CFTC

Short bets, which profit when values fall, exceeded long bets, which benefit when prices gain, by 80,666 lot – reflecting net selling of 178,404 contracts, the second largest in four years, and across grain, soft commodity and livestock complexes.

The selling reflected a hike in short positions back above 1.0m bets rather than a cut in long holdings, which were reduced by less than 14,000 contracts.

Open interest - that is the number of live contracts – took another leap of more than 100,000 lots to exceed 1.64m contracts.

Cool on coffee

In soft commodities, including in sugar, hedge funds raised both long and short bets.

Speculators' net longs in Chicago livestock, Aug 22, (change on week)

Live cattle: 81,396, (+221)

Lean hogs: 75,680, (-5,469)

Feeder cattle: 11,038, (-1,556)

Sources: Agrimoney.com, CFTC

Still, a net selldown was marked in all four major New York-traded soft commodity contracts in the latest week, with the net short in cocoa futures and options juked by more than 13,500 lots to 49,089 contracts, back within range of the record set last month,

The selling reflects ideas of a boost to world supplies from strong West African output prospects.

In arabica coffee, hedge funds returned to a net short, thanks to the biggest week for selling in two years, in a week in which the International Coffee Organization lifted its forecast for world coffee output in 2016-17 by 2.3m tonnes to a record 153.9m tonnes.

More selling to come?

In grains, including the soy complex, hedge funds were net sellers of nearly 120,000 lots to return to a net short position, led by a jump in bearish bets on Chicago corn.

Speculators' net long in Chicago grains, Aug 22 (change on week)

Soyoil: 44,604, (-1,426)

Kansas wheat: 23,770, (-10,839)

Corn: -17,073, (-56,875)

Soybeans: -23,394, (-8,995)

Soymeal: -34,555, (-8,980)

Chicago wheat: -66,751, (-32,515)

Sources: Agrimoney.com, CFTC

"Managed money now has flipped net short - mostly on adding new short rather than unloading longs," said Water Street Solutions.

"Russian wheat supplies continue to weigh on global feed grains while South America dominates the corn export business."

In wheat itself, hedge funds raised their net short in Chicago soft red winter wheat, the world benchmark, by more than 32,000 lots.

Nonetheless, there were ideas that the bearish shift in position may not be over yet, with benson Quinn Commodities saying that while the data "did confirm recent selling, it did not eliminate additional selling".

Funds' net short holdings in corn and wheat remain well short of record levels.

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