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Hedge funds extend sell down ags again, led by stampede from hogs
By Mike Verdin - Published 04/09/2017

Hedge funds continued to rebuild bearish bets on farm commodities, helped by the biggest selldown in lean hogs in four years - according to data which spurred some questions over the appetite for further selling in wheat and soybeans, and cocoa and coffee too.

Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 47,245 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The increased net short position - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain reflected increased betting on declines in grain and livestock markets.

Indeed, in the main New York-traded soft commodities, such as cotton and sugar, hedge funds reduced their exposure to price falls, reflecting in part a save of short-covering in cotton as Hurricane Harvey battered the key US growing state of Texas.

Stampede from hogs

In Chicago-traded livestock futures and options, a cut in the net long to a five-month low of 156,216 contracts reflected in the main a bailout by managed money from bullish bets on lean hogs, fuelling a slump which has seen prices tumble by nearly 14% from an August 16 high, for the spot October contract.

Speculators' net longs in Chicago livestock, Aug 29, (change on week)

Live cattle: 81,010, (-386)

Lean hogs: 64,209, (-11,471)

Feeder cattle: 10,997, (-41)

Sources: Agrimoney.com, CFTC

The lot last Wednesday fell below 60 cents a pound for the first time in 2017, before staging a modest recovery later last week.

The decline reflects a rise in slaughter rates to 2.344m hogs in the latest week, and with expectations that the figure will "be even larger still in September and October", said livestock analysts at Steiner Consulting.

"Based on recent trends, the last four weeks, we could see slaughter up at least 2.5% from a year ago, which would put average weekly kill at around 2.490m head," the group said.

"However, if slaughter starts to approach the levels indicated in the June survey, then we could see average weekly slaughter in the 2.525m area."

The strong output has spurred steep price cuts by packers in an effort to shift pork, with the value of bellies, for instance, tumbling 41% during August to finish the month at $126.28 per 100 pounds.

'Slightly supportive'

Among grains, the CFTC data showed hedge funds selling down contracts by more than many investors had expected.

Speculators' net long in Chicago grains, Aug 29 (change on week)

Soyoil: 66,871, (+22,267)

Kansas wheat: 18,060, (-5,710)

Soybeans: -28,367, (-4,973)

Soymeal: -36,152, (-1,597)

Corn: -64,945, (-47,872)

Chicago wheat: -77,529, (-10,778)

Sources: Agrimoney.com, CFTC

"Compared to the daily estimate of funds, large speculators were selling more corn, soybeans and wheat than what the trade estimated," said Terry Reilly at Futures International.

In Chicago, corn, they took their net short to a three-month high, after the Farm Journal Midwest crop tour eased concerns over crop damage from poor weather.

And for Chicago wheat futures and options, speculators were net sellers for a seventh successive week, the longest such streak in three years, rebuilding their net short position above 77,000 contracts.

Such a position was "slightly supportive" to futures prices, said Benson Quinn Commodities, with heavy selling often inspiring ideas that funds may take a breather before adding further such bets, or even take profits on gains made.

By contrast, in Kansas City-traded hard red winter wheat, and Minneapolis spring wheat, in which hedge funds retained net long positions, "they are still too long," the broker said.

"Their positions in Kansas City and Minneapolis like negative factors going into" this week.  

'Little producer selling'

By contrast, it was for separate CFTC data, on positioning by commercial operators such as producers and processors, that Benson Quinn Commodities found cause to support ideas price support.

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

Aug 29: -127,911, (-47,245)

Aug 22: -80,666, (-178,404)

Aug 15: 97,738, (-173,212)

Aug 8: 270,950, (-68,777)

Aug 1: 339,727, (-20,483)

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

Sources: Agrimoney.com, CFTC

The broker termed "nominal" a net short of 8,831 lots in soybeans held by commercial investors.

"This was down nearly 10,000 contracts from last week and shows how little producer selling there has been over the past several months," the broker said.

Such dynamics highlighted the "supportive and firmer tone in the market" on Friday, with a "lack of sellers, with technicals supportive, fund short-covering, and a drop in cash market shutting off fresh producer selling

"Supplies remain bearish but the producer is not interest at current values."

Hurricane fears

Among soft commodities, hedge funds lifted their net long in New York cotton futures and options by more than 12,000 contracts, as Hurricane Harvey's entry into Texas spurred worries over output in the top US producing state.

Speculators' net longs in New York softs, Aug 29, (change on week)

Cotton: 35,579, (+15,530)

Arabica coffee: -23,648, (-9,307)

Cocoa: -47,514, (+1,575)

Raw sugar: -126,482, (+8,518)

Sources: Agrimoney.comn, CFTC

Most of the swing in net positioning was down to covering of short-bets, which fell by nearly 10,000 lots week on week.

In raw sugar, managed money retreated from a record net short, encouraged by Brazil's imposition of a tax of 20% on ethanol imports which, in provoking higher expectations for domestic output of the biofuel, would limit cane available for sugar production ahead.

"As we are in the peak of the [Brazilian Centre South cane] harvest, the tax does not change current ethanol supply, but will support ethanol prices next year," Rabobank said.

'Vulnerable to short-covering'

Societe Generale said that, despite hedge funds' latest move, New York sugar futures remained "oversold" and "vulnerable to short-covering" an analysis it applied to New York traded cocoa and arabica coffee too.

In arabica coffee, hedge funds have turned their net short by some 24,000 contracts over two weeks.

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