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|Hedge funds sell wheat 'with reckless abandon' as ags' appeal wanes
By Mike Verdin - Published 12/12/2016
December has brought a more bearish streak to hedge funds' thinking on the agricultural commodity complex - including selling hard wheat "with reckless abandon", a move which could leave them open to losses.
Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by 34,427 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The decline in the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – reflected selling in both grains and soft commodities.
In New York-traded softs, hedge funds cut their net long for a sixth successive week, the longest selldown in more than two years.
In grains, the reduction in the net long was led, unusually, by selling in Kansas City-traded hard red winter wheat, a contract which has historically seen relatively light fund interest compared with Chicago soft red winter wheat, the global benchmark.
Hedge funds cut their net long in Kansas City wheat futures and options by nearly 14,000 lots in the latest week, the biggest selldown on records going back to 2006.
The shift corrected the unexpected building of a significant net long holding in Kansas City wheat last month - amid fears of dryness threatening seedlings in the US Plains, where the variety is mainly grown.
"Record US hard red winter wheat stocks and underwhelming export demand weighed on the market" in the latest week, Rabobank said..
However, the extent of the selling may, if weather fears return, backfire on the many funds which took out short positions, during the latest week, broker Benson Quinn Commodities warned.
"Managed money sold Kansas City futures with reckless abandon, and may be caught the wrong way," Benson Quinn Commodities said, if acknowledging that cold weather so far in the Plains had likely not been severe enough to harm crops.
"There is some chatter about the cold temperatures and potential effects on hard red winter wheat in north west Kansas, north east Colorado and western Nebraska.
"While the conditions were subpar, I doubt significant damage was done to the crop."
However, cold temperatures are expected to return this week, a threat which, while less than that feared last week, will still be a "close call to watch for the north half of the wheat belt", according to Commodity Weather Group.
Concerns have been enhanced by spreading dryness in parts of the Plains, with nearly 30% of Kansas, the top winter wheat growing state, rated by the US Department of Agriculture as in drought, and 58% of Oklahoma.
'Can become a liability'
Among soft commodities, the selling was led by arabica coffee futures and options, in which managed money also cut its net long by 13,980 contracts, the biggest such move in 15 months.
Rabobank said: "During the week, Colombia announced the largest monthly production number since 1998, and the weather continued to be favourable in Brazil," factors accelerating a decline in arabica futures, which for March stood on Monday 22% below a high reached on November 8.
However, cotton continued to buck the trend, with hedge funds raising their net long by 1,312 lots to a fresh record high just short of 85,000 contracts – raising alarm bells among some investors over the impact on prices should funds be tempted to sell down.
"We, among others, are optimistic about cotton's longer term prospects, but Friday's report is a setback on the bumpy road to higher prices," said Tobin Gorey at Commonwealth Bank of Australia.
The record net long position "can become a liability if the market's confidence is rattled – investors have plenty of selling power at their disposal".
'Risk of being short diminishes'
Hedge funds also reverted to buying sugar, helped by Monday's announcement by Petrobras, Brazil's state energy company, of an 8.1% hike in gasoline prices, so boosting prospects too of values of ethanol and, in turn, of sugar, which compete with the biofuel for cane.
For sugar, "we that the [price] floor is already visible, so the risk of being short diminishes," said Marex Spectron, the London broker, if flagging "bearish factors", such as "very long" funds, still mitigating against a sharp price recovery.
In the Chicago-traded livestock complex, meanwhile, managed money lifted its net long in live cattle futures and options to a 17-month high of 73,492 lots, with buying spurred by firm US cash markets and a recovery of some 5% in beef prices from a mid-October low.
However, futures have eased back in recent sessions, amid ideas of continued recovery in the size of the US herd.
"While higher cash prices for live animals are good news for cattle feeder and cattle producers, it is important to remember the industry is going into 2017 expecting another year-over-year increase in beef cattle inventory and beef production during the year," said Paragon Economics and Steiner Consulting.
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