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|Funds lift bearish ag bets near to record - spurring weather rally talk
By Mike Verdin - Published 01/05/2017
Hedge funds extended bearish bets on ags to the second highest on record, including their biggest ever net short in wheat and a larger-than-expected net short in corn – raising the potential for weather setbacks to spur price surges.
Managed money, a proxy for speculators, lifted its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to hogs, by 68,232 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The increase took the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – to 231,206 lots, a reading beaten only once in data going back to 2006.
It also represented a 10th successive week in which hedge fund sales in ags exceeded purchases, the second longest such spree on record, behind only an 11-week run which ended in early 2014.
'Shorts larger than expected'
Net selling was evident in all three ag sectors – grains, soft commodities and livestock – although in particular in grains, including the soy complex, in which hedge funds lifted their net short by more than 43,000 lots to an all-time high of 462,912 contracts.
In Chicago-traded wheat, the managed money net long hit a record high of 162,327 contracts, as US rains continued to ease concerns over the country's winter wheat crop.
In corn futures and options, speculators raised their net short by nearly 25,000 contracts to 196,257 lots, while in soymeal, they turned net short for the first time in a year.
"Managed fund shorts in corn, wheat and soy were larger than expected," said Richard Feltes at RJ O'Brien.
'Cigar party in the gun powder room'
Indeed, the extent of the selling funds have undertaken revised concerns that grain markets were vulnerable to a surge higher if managed money is spurred to close these bets – an outcome some investors believe looks more likely thanks to weather threat.
In wheat, Water Street Solutions, which last week compared the large net short position in Chicago to a geyser threatening to blow, said this time that "funds posted a new record net short in Chicago which is starting to feel like hosting a cigar party in the gun powder room.
"While there is plenty of wheat supply in the world, the narrative seems be shifting a bit.
"Europe and Black Sea production is facing too-dry conditions, the US Plains face cold and snow, US winter wheat may be facing disease issues off the over-wet conditions and the spring wheat pace has been hindered by snow and cold."
'Some damage to wheat'
In fact, the US Plains saw cold temperatures over the weekend which brought up to 17 inches of snow to north west Kansas, according to weather service MDA, besides representing a threat to winter wheat crops which, now well clear of dormancy, are more vulnerable to frost.
Weather service MDA said: "Low temperatures [on Sunday morning] in far western Texas, far western Oklahoma, and far western Kansas were in the upper 20s Fahrenheit, causing some damage to wheat."
It added that "high winds in western areas may cause lodging damage to jointing/heading wheat".
Commodity Weather Group cautioned that "freeze risk remains" for Monday and Tuesday mornings too for western parts of the central Plains.
'Short covering trigger'
In corn, hedge funds extended their net short to a 13-month high of approaching 200,000 lots, again spurring ideas that weather upsets could provoke a rash of short-covering, and send prices soaring.
"Look for growing season hiccups to trigger short covering and provide new crop opportunities in the $4.10-4.20 a bushel area," Water Street Solutions said.
The comments come as wetness is hampering Midwest corn sowings, with Commodity Weather Group saying that some parts of the Midwest – southern Missouri and parts of southern Illinois and Indiana – received "excessive" rain of up to 8 inches over the weekend.
Eastern Iowa, north west Illinois and Wisconsin saw rains "less widespread" than had been expected.
Expectations differ for Midwest weather prospects for this week, with MDA saying that "showers in southern areas this week will maintain wetness threats and stall corn/soybean planting".
However, at Commonwealth Bank of Ausralia, Tobin Gorey said that "forecasters say nearly a week of drying ahead should limit the risk of standing water and allow planting to resume, albeit slowly.
"And long range weather models also suggest warming and continued drying will feature during the second half of May."
Joe Lardy at CHS Hedging added that "the market is really focused on the planting window that should open up next week.
Benson Quinn Commodities said that "the potential for short covering does exist if wet conditions hamper planting progress", further information on which will be revealed in weekly US Department of Agriculture crop progress data later on Monday.
Richard Feltes at RJ O'Brien said that the report should show corn sowings at 33-36%, up from 17% last week but behind a typical 38%.
At Futures International, Terry Reilly said that "we are hearing planting progress will still show a good jump as many producers were able to plant corn in Illinois and Indiana over the last week".
Coffee, sugar out of favour
In New York-traded soft commodities, the CFTC data showed the selling led by sugar and coffee, in both of which hedge funds cut their positioning to the most bearish in a little more than a year.
The growing net short in arabica coffee has proven a winning bet, given a fall in prices to a 10-month low last week, albeit one which has surprised many observers including Rabobank, which said that there had been "no change in fundamentals.
"If anything, the continuous dryness in Brazil's main coffee areas could worsen the conversion rate" of cherries to green beans, the bank said.
Brazil's CNC producers group said the drop in prices reflected high inventories in the US, fresh weakness in the real, which cuts the value of assets in which Brazil is a major influence, and the proximity of the forthcoming harvest, and the boost to supplies it will bring.
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