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Hedge funds swing back to buying softs, rather than grains
By Mike Verdin - Published 31/07/2017

Hedge funds lost their preference for grains over soft commodities, as fears over North American wheat crop losses went off the boil, while comfort over supplies of the likes of cocoa and cotton supplies waned.

Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to corn, by 29,667 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The increase in the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall reflected buying in both grain and soft commodity complexes, although betting on Chicago livestock contracts turned a little less positive.

However, in contrast to the recent trend, soft commodities were far more popular in the latest week this after hedge funds built a record net short position in the complex earlier this month, and the most bearish position, relative to grains, for nearly five years.

First time in more than a year

Indeed, hedge funds swung more bearish in positioning in futures and options on all four main New York-traded soft commodities arabica coffee, cocoa, cotton and raw sugar for the first time in more than a year.

Speculators' net longs in New York softs, July 25, (change on week)

Cotton: 18,655, (+1,292)

Arabica coffee: -21,765, (+7,756)

Cocoa: -45,450, (+6,840)

Raw sugar: -99,720, (+12,330)

Sources: Agrimoney.com, CFTC

Sentiment has been improved in part by a recovery in the Brazilian real, a dynamic which boosts the value in dollar terms of assets such as coffee and sugar in which the South American country is a major force.

However, buying has also reflected ideas that price routs which forced cotton futures to a 10-month low last month, coffee and sugar prices to 16-month lows, and cocoa futures to their weakest in nearly a decade, may have gone far enough to price in improved supply hopes.

Futures in all three have recovered notably since, with cocoa futures soaring on Friday in a jump attributed by some investors to short-covering by funds giving up on the prospect of further price losses.

'Improved sales volumes'

As of last Tuesday, managed money held a net short in New York cocoa futures and options of 45,450 lots still large by historical standards, but down by nearly 7,000 lots from the record set the previous week.

Speculators' net long in Chicago grains, July 25 (change on week)

Corn: 106,815, (+2,145)

Soyoil: 62,628, (+13,680)

Kansas wheat: 60,655 (-10,263)

Soybeans: 50,885 (+12,534)

Chicago wheat: 27,850, (-8,076)

Soymeal: -4,381, (-3,745)

Sources: Agrimoney.com, CFTC

While hopes for West African cocoa output remain large, Jack Scoville at Price Futures also flagged "some questions about world production potential" given the impact of weak prices in deterring use of inputs such as fertilizer while "chocolate manufacturers in general have reported improved sales volumes".

Results from Barry Callebaut, the world's biggest chocolate maker, earlier this month revealed a return to growth in global industry chocolate demand in the February-to-April period.

In raw sugar, hedge funds cut their net short position back below 100,000 lots thanks to their strongest buying spree in six months, encouraged by ideas that prices had gone low enough to persuade many Brazilian mills to turn cane into ethanol rather than the sweetener.

'Price rise to continue'

Meanwhile in arabica coffee, hedge funds cut their net short for a fourth consecutive week, matching the longest buying spree in nine months, encouraged by reports of crop damage in Brazil, besides by strength in the real.

As Commerzbank has noted, this setback "could tighten the supply of high-quality coffee in particular as the current crop is from a low-yield year in the two-year crop cycle.

"The price rise is therefore likely to continue."

'Temperatures have been sweltering'

In cotton, speculators turned small net buyers, ending a record-matching selling spree of nine consecutive weeks, with improved sentiment reflecting growing worries over the crop in the key US state of Texas.

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

Jul 25: 360,210, (+29,667)

Jul 18: 330,543, (+27,153)

Jul 11: 303,390, (+330,243)

Jul 3: -26,853, (+168,555)

Jun 27: -195,408, (-132,124)

Jun 20: -63,284, (+14)

Jun 13: -63,298, (+176,502)

Sources: Agrimoney.com, CFTC

US farm officials last week, cutting their rating on the US cotton crop, warned of crop damage from "high winds carrying dirt and sand, along with multiple hail events" in Texas.

Tobin Gorey at Commonwealth Bank of Australia on Monday also flagged the threat from dryness, saying that rainfall coverage for US cotton "has been patchy, something weather forecasters expect will continue over the next few days.

"Crops need the moisture because temperatures have been sweltering through the weekend in almost all US cotton regions."

'Bearish for trade'

In the grain and soy complex, hedge funds lifted their net long in Chicago soybean futures and options back above 50,000 lots for the first time in four months, after official US data also showed a sharp deterioration in the condition of the domestic crop.

However, wheat futures suffered selling, in winter and spring contracts, as deterioration in the US spring wheat crop was shown slowing, against a backdrop of ample supplies of lower-quality wheat.

Benson Quinn Commodities said that the US regulatory data look "bearish for trade on Monday with funds still too long in Kansas City hard red winter wheat versus last week's price action".

In Chicago soft red winter wheat, hedge funds are "probably not short enough", a factor "bearish" for prices, the broker added.

Cattle crushed

In the Chicago livestock complex, hedge funds cut their net long to a two-month low of 204,038 contracts, reflecting a sixth successive week of selling in live cattle futures and options the longest selldown in 14 months.

Speculators' net longs in Chicago livestock, Jul 25, (change on week)

Live cattle: 110,702, (-2,593)

Lean hogs: 77,302, (-2,597)

Feeder cattle: 16,034, (+320)

Sources: Agrimoney.com, CFTC

The shift followed US Department of Agriculture data showing that feedlots raised buy-ins of feeder cattle for fattening up by 16.1% last month well above the 5.9% increase that investors had expected.

"Profitability has allowed cattle feeders to aggressively buy animals," livestock analysts at Steiner Consulting said.

"The result has been more steers and heifers placed on-feed than a year ago and higher feeder cattle prices."

However, the data have undermined the buoyancy in prices, with feeder cattle futures down 4.5% last week on a spot contract basis, with live cattle falling 3.0%.

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