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Hedge funds switch selling to softs, from soybeans and wheat
By Mike Verdin - Published 18/01/2016

Hedge funds extended bets on price falls agricultural commodities to the biggest in more than seven months –this time led by pessimism on softs, in which they swung bearish at the fastest pace on record.

Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities by more than 53,000 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The shift took the net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain - to 143,272 lots, the most since May.

And it extended the switch negative in sentiment since mid-December, when managed money held a net long of more than 190,000 contracts.

Softs in the firing line

However, the data for the latest week revealed a chance of tack in hedge funds' strategy for betting on falling prices, with the target for selling changing from grains, which bore the brunt of short betting late in 2015, to New York-traded soft commodities such as cocoa and cotton.

Speculators' net longs in grains and oilseeds, Jan 12 (change on week)

Chicago soyoil: 32,847, (-14,533)

Kansas wheat: -15,472, (+2,671)

Chicago soymeal: -46,076, (+3,312)

Chicago soybeans: -53,040, (+26,507)

Chicago wheat: -71,488, (+24,655)

Chicago corn: -186,831, (-24,843)

Sources: Agrimoney.com, CFTC

Indeed, managed money, having extended its net short in grains and soy to a record high of more than 357,000 contracts in the opening days of 2016, pulled back in the latest week, cutting it by nearly 18,000 lots.

Extreme positioning, net long or short, tends to make speculators think twice about extending the bet further for fear that it has become too "crowded" and prone for a reversal, causing a contrary price move.

And in wheat, they had an extra reason to reassess bearish betting, after the US Department of Agriculture on Tuesday revealed that domestic winter wheat sowings ahead of the 2016 harvest had fallen well below market expectations to the second lowest in a century.

'Surprised not more price weakness'

Instead, hedge funds turned their selling to soft commodities, and in particular to raw sugar, in which they cut their net long by more than 29,000 lots, hurt by the boost to production from an extended cane crushing season in Brazil as well as by the economic uncertainties over China.

Speculators' net longs in New York softs, Jan 12 (change on week)

Raw sugar: 127,370, (-29,197)

Cocoa: 25,360, (-14,731)

Cotton: 21,758, (-20,692)

Arabica coffee: -21,585, (-13,484)

Sources: Agrimoney.com, CFTC

China is the top importer of sugar, as well as of cotton – a factor which fuelled a selldown by funds in the fibre too in its net long to the lowest in 14 months.

"The hedge fund net long position [was] reduced almost by half," said Dr John Robinson, cotton marketing expert at Texas A&M University, adding that separate CFTC data showed a "liquidation of long positions" by index funds too.

"I am frankly surprised that there was not more price weakness associated with such repositioning," Dr Robinson said, with the drop in the spot New York contract over the week limited to 0.5%.

Needed rains

Hedge funds also slashed their net long in New York-traded cocoa to the lowest in eight months, amid a tumble in prices blamed in part on China worries and also by some ideas that West African output may turn out higher than thought.

Speculators' net longs in Chicago livestock, Jan 12, (change on week)

Lean hogs: 22,263, (+3,260)

Live cattle: 19,385, (+3,291)

Feeder cattle: 2,237, (+781)

Sources: Agrimoney.com, CFTC

New York cocoa futures tumbled by 6.5% over the week.

And in arabica coffee, speculators extended their net long at the quickest pace in four months as rains in top Brazilian producing states Minas Gerais and Sao Paulo ease concerns about the 2016 harvest.

"Rains over recent days in the main arabica-growing regions of Brazil," in raising hopes for "normal" growing conditions after droughts for parts of 2014 and 2015, have "reinforced the downward trend in international coffee prices", said Silas Brasileiro, executive presidente of Brazil's Conselho Nacional do Café producers' group.

Bearish on corn

By contrast, in grains, Chicago corn was in a minority of contracts in suffering further selling – with hedge funds extending their net short to 186,931 contracts, a record high on data going back to 2006, reflecting enhanced competition from Argentina on export markets.

That said, corn futures managed small price gains over the week nonetheless, with Benson Quinn Commodities noting that "the new shorts in the corn are interesting as [futures] refused to put in a new low, and rallied".

In Chicago livestock, hedge funds raised their net long to the highest in two months, led by a fifth successive week of bullish positioning in lean hog futures and options.

Lean hog futures have staged a revival of some 20% from mid-November lows, helped by an improvement in wholesale values.

Paragon Economics and Steiner Consulting also noted "confidence that pork prices in February will continue to gain ground and thus set the stage for even higher hog prices than what's currently priced by [futures].

"This could very well be the case and it is always possible that retailers may promote pork in February to take advantage of historically low prices."

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