Hedge funds wrong-footed, again, by downbeat grain bets
By Mike Verdin - Published 03/07/2017

Funds are likely to be forced into a round of short-covering in grains, putting further upward pressure on futures, after being caught out again by betting on lower prices just ahead of bullish news.

Managed money, a proxy for speculators, cut its net short position in futures and options in the top 13 US-traded agricultural commodities, from arabica coffee to live cattle, by 132,124 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The cut in the net short position (the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain) reflected bearish positioning in all three complexes - grains, livestock and soft commodities.

However, in corn and soybeans in particular, funds' bearish betting has appeared misplaced, raising the potential for short positions to be closed, putting yet further upward pressure on prices.

'Sold too many soybeans'

In soybeans, managed money extended its net short position in Chicago futures and options to more than 118,000 contracts in the latest week the highest figure on records going back to 2006.

However, the latest short bets have been left well out of the money by a rise in prices spurred by worries over hot Midwest weather, provoking concerns for US yields, and by US Department of Agriculture data on Friday showing domestic sowings of the crop this year at a level well below market expectations.

US soybean inventories as of June 1 also fell below forecasts, spurring ideas of stronger-than-expected consumption.

Indeed, the data imply a US soybean carryout for 2016-17 "of 400m bushels versus the USDA's current 450m-bushel estimate", said broker Benson Quinn Commodities.

Finds "sold too many soybeans", Benson Quinn Commodities said, adding that the "record fund short will bring follow-through buying" in the oilseed.

'Short-covering situation'

Soybean futures for August have risen by more than 5% since Tuesday, when the data were taken.

The broker added that hedge funds had "sold too many" corn contracts too, in driving their net short up by more than 50,000 lots to back above 106,000 contracts again preceding a market rally.

Corn futures for September are up more than 6% since last Tuesday, pulled higher by worries over Midwest weather, and gains in rival grain wheat, which helped them overcome some ostensibly bearish data in Friday's USDA reports.

"The funds entered the report with large short position, and will likely need to cover this coming week," Water Street Solutions said, flagging forecasts of "above-average temperatures for July, especially for the western Corn Belt.

"Funds are facing a short-covering situation and a less than perfect weather outlook should continue to give upside opportunities," the ag advisory group said, noting $4.10-4.50 a bushel as the "upside target" price for corn futures, a levels not seen for a year in Chicago on a spot contract basis.

'Still had plenty to buy'

In wheat, speculators proved more profitably positioned in raising their net long position in Kansas City-traded hard red winter wheat to the highest in three years, as futures accelerated to, on Monday, their highest level in nearly two years.

In Chicago soft red winter wheat, also at a near-two-year high, hedge funds at least managed to trim their longstanding net short bet, although Tobin Gorey at Commonwealth Bank of Australia said that "investors still had substantial short positions last Tuesday".

"Investors thus still had plenty to buy still late last week," he said, adding that Chicago wheat futures were also likely be boosted by the entry of momentum investors into the contract, besides by spillover from the surge in futures in drought-hit US spring wheat, as traded in the lower-profile Minneapolis market.

Mr Gorey said: "Investors like liquidity. Minneapolis, being a small market, offers modest liquidity. Investors will choose not to trade, or might even be prohibited, from trading that market.

"The action naturally tends to spill into other, correlated, markets," with Chicago the most liquid world wheat market.

Record cool on coffee

In soft commodities, many hedge funds were caught out in sugar too, raising their net short to 113,484 lots, the second highest on record, just ahead of a bounce in prices.

In arabica coffee, a rise in the net short to an all-time high of 43.619 lots appears more comfortably placed, with prices recovering only marginally since last Tuesday.

In cotton, managed money cut its net short to 13-month low of 31,410 lots, in a sixth successive week of bearish positioning in the fibre, the longest such run in nearly two years, amid strong expectations of US production this year.

Still, such ideas took a backwards step on Friday, when the USDA, spurring a recovery in futures, reduced its estimate of domestic sowings this year rather than raising it as the market had expected.

© Agrimoney 2017