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|Hedge funds pull out of ag selling - ahead of index fund purchases
By Mike Verdin - Published 09/01/2017
Hedge funds entered 2017 in a more bullish spirit, pulling out of selldowns in the likes of corn and most soft commodities, as the index fund reweighting process, expected to bring buying to most contracts, approached.
Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, from cattle to sugar, by 5,591 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The increase in the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – reflected a recovery in particular in sentiment on New York-traded soft commodities, such as cocoa and sugar.
Hedge funds raised their net long in softs for the first time in 10 weeks, so bringing an end to a spell of bearish positioning which matched the longest on records going back a decade.
And the, modestly, more bullish positioning came ahead of an annual index fund rebalancing process, this week, which will bring buying to most agricultural commodity contracts, on Societe Generale calculations.
Bullish on cattle
The rebalancing procedure sees index funds rejig commodity allocations their portfolios to the weightings decreed by the index followed – a process which can often involve buying the laggards of the previous year, while selling the better performers.
Among agricultural commodities, live cattle are expected to be the biggest beneficiaries of this year's reweighting process, requiring $1.06bn purchases by funds, with $115bn under management, following either the key S&P GSCI and Bcom index, according to SocGen.
Hedge funds in the week to last Tuesday raised their net long in Chicago live cattle futures and options for a seventh successive week, taking it to a two-year high of nearly 155,000 contracts, with a boost to demand from beef price falls also seen as boosting sentiment.
By contrast, hedge funds trimmed their net long in lean hogs, in which a substantial price rally from 14-year lows hit in October has curbed the prospect for index fund buying this week, with the higher values having already boosted the effective weighting of the contract in index fund portfolios.
However, most market talk has centred on the prospects for index fund buying of grains, with corn and wheat – although not soybeans – expected to attract particular purchasing.
Hedge funds – in a bigger buying spree than the market had expected, according to Richard Feltes at Chicago broker RJ O'Brien - slashed by more than 17,000 lots their net short in corn, on which index funds are expected to splash out some $1bn this week.
"The index fund rebalancing starting January 9 reportedly will trigger 60,000-100,000 new corn long contracts," besides 30,000-50,000 new wheat longs, Mr Feltes said.
Indeed, in wheat too managed money reduced its net short, amid concerns that frost has damaged the US crop, but also ahead of potential index fund purchases.
'Should be significant buying'
At CHS Hedging, Joe Lardy put the potential for index fund wheat buying at 40,000-60,000 contracts, highlighting too that, with the wheat market being less liquid than that for corn, the impact on prices could be greater.
"There should be significant buying of wheat futures in order to get the wheat allocation back in line," he said.
"That market is much thinner than corn so the chatter is that the buying impact will be more influential."
However, in soybeans, which are not expected to attract many index fund purchases, hedge funds cut their net long for a fifth successive week, amid concerns too over a seasonal switch importers to buying from South America – a trend which appeared borne out by US export data on Friday.
In soybeans, "the rebalance is less than 10,000 contracts so it shouldn't be a market moving input", Mr Lardy said.
Among soft commodities, hedge fund purchases in cotton tallied with expectations of index fund buying – besides some concerns, from data on warehouse receipts, that the latest US harvest may not have met the USDA estimate.
But on raw sugar, hedge fund purchases of more than 7,000 lots – the biggest weekly buying in four months – contrasted with expectations from SocGen at least of index fund selling this week, to the tune of $500m.
However, some other commentators have a different assessment on sugar, with Marex Spectron saying that the "index funds should be small net buyers".
The London broker added that this factor "supports our bullish stance" on sugar, which was also supported by the comparative prices of ethanol and sugar in Brazil, and by, in India, the earlier-than-expected seasonal closure of many mills in the major producing state of Maharashtra.
This closing of mills may mean that total cane availability is much lower than expected.
"Almost all analysts have collectively lowered their estimates [for Indian sugar output in 2016-17] by about 1m tonnes."
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