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Banks and hedge funds aligned on poor wheat price prospects
By Mike Verdin - Published 19/04/2017

Analysts concur with hedge funds that wheat prices may be in for a long spell of weakness, but are more upbeat on prospects for cocoa and soybean futures, and more pessimistic on cotton values.

Banks, including Australia & New Zealand Bank, Danske Bank and Societe Generale, monitored by FocusEconomics month on month nudged higher by $0.03 a bushel, on a consensus basis, their forecast for average Chicago wheat futures prices in the October-to-December quarter.

However, at $4.66 a bushel, the forecast remains a little shy of the $4.71 a bushel that December futures are pricing in.

And, for the October-to-December period of next year, banks trimmed their average price forecast by $0.05 a bushel to $4.95 a bushel - further below the expectations of a market pricing the December 2018 contract at $5.29 a bushel.

Hard vs soft

FocusEconomics flagged pressure on prices from "reports of bountiful stocks and stronger-than-expected global production thanks to generally agreeable weather".

Speculators' net long in Chicago grains, Apr 11 (change on week)

Soymeal: 7,536, (-6,406)

Kansas wheat: -12,201 (-4,608)

Soybeans: -29,733 (-30,455)

Soyoil: -50,706, (-11,910)

Chicago wheat: -134,459, (+4,375)

Corn: -158,417, (-8,130)

Sources: Agrimoney.com, CFTC

And the negative sentiment tallies with positioning of hedge funds, which latest data, as of Tuesday last week, showed holding a net short of 134,459 lots in Chicago soft red winter wheat futures and options, as measured by the "managed money" category of Commodity Futures Trading Commission data.

That was one of the largest net short positons ever, close to the record of 151,417 lots set in October, although was down 4,375 contracts week on week.

Managed money instead switched its selling focus in wheat to Kansas City-traded hard red winter wheat, turning net short in the contract for a sixth successive week, matching the longest such streak in the last six years.

Hard red winter wheat is grown largely in the US southern Plains, where rains have eased concerns over dryness setting back crops.

'Room to add shorts'

However, analysts are more upbeat than hedge funds on prospects for soybeans, seeing prices in the last three months of this year averaging $9.72 a bushel, some $0.12 ahead of November futures.

Speculators' net longs in New York softs, Apr 11, (change on week)

Cotton: 80,268, (-14,461)

Raw sugar: 40,524, (-2,857)

Arabica coffee: -810, (+1,036)

Cocoa: -22,437, (-6,635)

Sources: Agrimoney.com, CFTC

For the October-to-December period of next year, banks see Chicago soybean futures averaging $10.18 a bushel - $0.70 a bushel ahead of the price the November 2018 contract is trading at.

The expectations of price rises ahead contrasts with a return by hedge funds to a net short in Chicago soybean futures and options as of last Tuesday for the first time in 13 months.

And, managed money has "plenty of room to add short positions, which given the negative fundamental picture, probably isn't a bad idea", broker Benson Quinn Commodities said, flagging the strong Brazilian harvest and the prospect of record US soybean sowings this year.

Sweeter on cocoa

Analysts are also more upbeat on prospects for a cocoa price revival, forecasting New York futures averaging $2,175 a tonne in the last three months of this year, a marginal upgrade month on month, and $2,208 a tonne in the same period of 2018.

Speculators' net longs in Chicago livestock, Apr 11, (change on week)

Live cattle: 123,372, (+2,346)

Lean hogs: 24,620, (-7,766)

Feeder cattle: 19,793, (+2,240)

Sources: Agrimoney.com, CFTC

That compares with the $1,951 a tonne that futures for this December are trading at, and the $2,055 a tonne being priced into the December 2018 contract.

By contrast, managed money held a net short of 22,437 contracts in New York cocoa futures and options as of last Tuesday, increasing their betting on further price falls.

Broker Marex Spectron last week forecast that cocoa futures will retest, and potentially fall below, an eight-year low of $1,881 a tonne reached last month.

Cotton divergence

However, on cotton, it is hedge funds which are the more upbeat, holding a net long of more than 80,000 contracts, while analysts foresee price falls ahead.

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

Apr 11: -112,650, (-83,231)

Apr 4: -29,419, (-99,680)

Mar 28: 70,261, (-162,981)

Mar 21: 233,242, (-151,393)

Mar 14: 384,635, (-232,217)

Mar 7: 616,852, (-51,236)

Feb 28: 668,088, (-122,900)

Feb 21: 790,988, (-5,028)

Sources: Agrimoney.com, CFTC

Indeed, banks trimmed by 0.7 cents a pound to 68.8 cents a pound their forecast for average New York cotton prices in the last three months of this year, and by 0.7 cents a pound to 67.2 cents a pound their forecast for values in the October-to-December period of 2018.

Currently, futures are trading well above these levels, with the the December 2017 contract priced at 74.37 cents a pound, and the December 2018 lot at 72.00 cents a pound.

"Prices are projected to fall this year and next and the forecasts come amid uncertainty in the cotton markets, as the market is considering the impact of strong demand for the fibre in the US, but also prospects of a surge in the country's planting this year," FocusEconomics said.

© Agrimoney 2017