Hedge funds hike bearish bets on softs to record high - 'heralding price gains'
By - Published 26/06/2017

Hedge funds turned record bearish on soft commodities, raising ideas that prices are vulnerable to an upward spike from a change in sentiment, but continued to cut short bets on wheat, crystallising losses.

Managed money, a proxy for speculators, trimmed its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to cotton, by just 14 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

However, the small reduction in the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain -  disguised some substantial underlying shifts.

Most notably, in New York-traded soft commodities, speculators hiked their net short position by nearly 53,000 contracts, a historically large move, to 112,417 lots – the most bearish position in the complex on records going back to 2006.

Softs out of favour

The shift reflected selling in all four of the major New York-traded softs – cocoa, arabica coffee, cotton and raw sugar – in which the impact of some bearish ideas on individual supply ideas has been enhanced by broader selling in commodities.

Speculators' net longs in New York softs, June 20, (change on week)

Cotton: 45,344, (-23,571)

Cocoa: -29,703, (-2,984)

Arabica coffee: -37,506, (-6,519)

Raw sugar: -90,552, (-19,886)

Sources:, CFTC

The CRB commodities index last week fell to its lowest in 14 months, helped by a decline in oil prices.

And short selling on softs has been a winning bet for hedge funds, with cocoa futures falling 6.7% over the week, closer to 10-year lows, in a move Rabobank attributed to "the return of wet weather to the key cocoa areas of West Africa", a region responsible for most of the world's output of the bean.

Cotton futures last week set lows for 2017, while arabica coffee and raw sugar futures hit their weakest in 15 months.

'Alarms sounding'

However, the extent of the bearish betting in softs provoked ideas that further selling may be harder to come by, with this position beginning to look "crowded", encouraging many hedge funds to take profits, driving prices higher.

Speculators' net longs in Chicago livestock, June 20, (change on week)

Live cattle: 131,713, (-838)

Lean hogs: 66,435, (+1,832)

Feeder cattle: 15,561, (-1,603)

Sources:, CFTC

In cotton, for instance - in which hedge funds slashed their net long to a near-one-year low - "the market has… plenty of 'oversold' alarms sounding", said Tobin Gorey at Commonwealth Bank of Australia

Traders at Ecom said that "US weather is still a big component on the radar for traders, as any reports of crop damage over the next month could cause a rebound in the market".


Meanwhile in raw sugar, in which managed money raised its net short position to a two year high of more than 90,000 lots, the selling had left the "fund position now of a size the market considers lopsided", said Sucden Financial.

This implies that "the sugar bears are perhaps more vulnerable than normal to a correction" upwards in pricing.

Rabobank, flagging also that world sugar supplies have been drawn down by successive production shortfalls, said that "considering" the short position held by speculators, "any potential weather issues can spark a sharp price correction".

And in in coffee, the bank noted that "funds do not tend to stay net short for too long.

"If the [Brazilian] harvest proves to be smaller than they expect, or if there are weather issues during the key development time of the Brazilian flowering, then we may see a rush towards profit-taking."

'Leaning too short'

Among grains, there was some idea that soybeans could be vulnerable to short-covering, after funds returned to a selling trend which has reigned in all but three of the last 18 weeks.

Speculators' net long in Chicago grains, June 20 (change on week)

Kansas wheat: 37,701 (+13,813)

Soyoil: +4,769, (+21,609)

Chicago wheat: -20,971, (+61,888)

Soymeal: -45,110, (-364)

Corn: -53,825, (-35,896)

Soybeans: -87,140 (-7,647)

Sources:, CFTC

"Despite what appears to be favourable growing conditions and the weak technical structure of the bean market, the funds may be leaning too short in soybeans," said Benson Quinn Commodities.

"I don't want to own beans, but I wouldn't be surprised to see a modest recovery in this market."

Ag advistory group Water Street Solutions said that "the market is reaching an overdone condition with bearish info getting well priced in.

"The large acreage from the USDA next Friday could very well score the summer low in soybeans."

While prices were facing pressure from ideas of strong US sowings, and benign Midwest weather, "the market is oversold and this is not a place to now get bearish".

Quality worries

However, in grains overall, including the soy complex, hedge funds reduced net short bets by more than 53,000 contracts to a three-month low of 164,576 lots, thanks to bullish sentiment on wheat inspired by the damage from drought to the northern US spring wheat crop, as well as some dryness problems in Australia, the EU and Ukraine too.

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

Jun 20: -63,284, (+14)

Jun 13: -63,298, (+176,502)

Jun 6: -239,800, (+4,808)

May 30: -244,606, (-89,453)

May 23: -155,153, (+7,988)

May 16: -163,141, (-8,947)

May 9: -154,194, (+35,047)

May 2: -189,241, (+41,965)

Sources:, CFTC

"Disappointing early US harvest results for winter wheat [compounded] concerns on the quality issues across wheat contracts," Rabobank added.

In Kansas City hard red winter wheat, managed money raised its net long position to 37,701 lots, the highest in three years.

In Chicago soft red winter wheat, the world benchmark, they cut bearish betting at the fastest in two years to cut their net short to a 19-month low of 61,888 contracts, and as prices were approaching one-year highs, implying the short-closing spree landed hedge funds with losses.

© Agrimoney 2017