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|Hedge funds 'may turn sellers' in wheat. But will sugar get back in favour?
By Mike Verdin - Published 08/05/2017
The US snowstorms which prompted fears of losses of up to 4m tonnes in output prompted a deep cut in hedge fund bets in wheat - in a move that could create scope for fresh selling, after damage estimates waned.
However, in soft commodities, selling continued for a 10th successive week, the longest such spree on record, with hedge funds turning net short on sugar for the first time since 2015.
Managed money, a proxy for speculators, cut its net short position in futures and options in the top 13 US-traded agricultural commodities, from soybeans to sugar, by 41,965 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The cut in the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – represented the first turn bullish in positioning since mid-February.
And it was led by grains, in which hedge funds cut their net short by more than 72,000 lots, after US storms which damaged winter wheat crops, and slowed plantings of spring crops, notably corn, enhancing the wetness which has hampered fieldwork.
Eyes on the storm
Indeed, in Chicago corn futures and options, managed money reduced a substantial net short which would, historically, have been an unusual position for this time of year - given the potential for weather upsets to disrupt seedings.
The extent of US stocks, and the prospect of a large Brazilian safrinha corn harvest ahead, has increased funds' confidence in betting on lower prices despite seasonal sensitivities.
However, most market anticipation on the CFTC report was focused on the numbers for winter wheat, which was seen as taking the brunt of the US snows, high winds and heavy rains, and at a time when crops, having emerged from dormancy, were more weather sensitive.
The CFTC data showed hedge funds – which had run up a record net short in Chicago soft red winter wheat ahead of the storms - cutting this by 37,698 lots in the week to last Tuesday.
In Kansas City hard red winter wheat, speculators swung bullish by the most on record, returning indeed to a small net long position.
'Not supportive to prices'
The extent of the short-covering in wheat was bigger than expected, said Richard Feltes at Chicago broker RJ O'Brien.
Indeed, with more selling undertaken than had been expected, Minneapolis-based Benson Quinn Commodities said that it did "not view the [positions] report for wheat as supportive" to prices.
Speculators' "short in Chicago has gotten much more manageable and they may turn sellers again in the hard wheat contracts".
Indeed, wheat futures, having soared 7% in Kansas City in the first two sessions of last week, have since lost most of those gains, amid waning estimates for the extent of damage from the storms, which had initially been as high as 4m tonnes.
A crop tour last week of Kansas, the top wheat-producing state, which was badly hit by the storm, showed yield prospects ahead of average, although some commentators urged caution yet against taking too much reassurance from the finding, with cold weather damage often difficult to spot.
"The degree of winter weather damage in the west is still not well quantified," Water Street Solutions said.
"The market will be watching not only for damage understanding but also what disease impact the wet weather will have on the winter wheats."
Soft on softs
Hedge funds remained sellers in the main New York-traded soft commodities in the latest week, cutting their net long for a 10th successive week, the longest such spree on data going back to 2006.
The latest selldown reduced the net long to 38,646 lots, the lowest in 14 months, and well below an early-February high of 270,293 contracts.
In cocoa, futures in which fell to their lowest in nearly 10 years last week on a spot contract basis, undermined by ideas of a longstanding glut in the bean, speculators hiked their net short to a fresh record high of 44,789 lots.
In arabica coffee, the managed money net short rose to its highest in 14 months, as traders bet on prices extending their break beneath 11-month lows reached in late April – although such hopes have so far been unfulfilled.
Arabica coffee, in gaining 1.7% last week, enjoyed its strongest week since January.
Ethanol parity reached?
Hedge funds enjoyed more luck in raw sugar, in which they swung bearish for 10th successive week, turning indeed net short on the sweetener for the first time in 19 months.
Raw sugar futures have continued to ease, dipping to 15.24 cents a pound on Friday for July delivery, the contract's lowest level in more than a year.
The extent of the price falls has in fact raised ideas that selling may ease, with prices approaching the "ethanol parity" level, below which it pays Brazilian mills to process cane into ethanol rather than sweetener.
"We would say that from a fundamental point of view it must be very close" to ethanol parity, broker Marex Spectron said.
"From here on down we could lose up to 6 million tons of supply if sugar continues to go down, providing of course that ethanol stays still."
In the Chicago-traded livestock complex, managed money cut its net long position, led by a reduction in bullish bets on cattle, after data showing a surprisingly strong rise in the number of animals taken in by US feedlots for fattening.
However, with some months to go before those cattle are ready to slaughter, cattle futures for near-term delivery have extended their rise, helped by rising beef prices and worries that the US storms have slowed weight gains on cattle, and caused some animal losses.
Spot live cattle futures touched limit up for three consecutive sessions before reversing, and tumbling the exchange maximum on Friday on profit taking.
Tobin Gorey at Commonwealth Bank of Australia said: "June futures' peak was up more than 15% on late April levels. The falls on Friday have knocked about a third off those gains."
The cattle market volatility comes as the US meat industry is preparing for the Memorial Day holding, on March 29, typically viewed as kicking off the summer grilling season.
With near-term beef supplies tight, Steiner Consulting said that "end-users coming into the spot market to fill Memorial Day needs are finding that a significant portion of the supply is spoken for.
"This is in part due to packers having sold more beef on a forward basis than before, and also because retailers and foodservice operators likely budgeted for lower prices and adjusted retail promos and menu prices accordingly."
US beef exports are also strong, soaring 25% year on year to 15,407 tonnes in March.
"This was the largest monthly beef export volume since June 2014," Steiner Consulting said, adding that "we think this is evidence that it was a combination of both domestic and export demand which pushed beef packers to ramp up slaughter during the first quarter".
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