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Hedge funds cover mass of grain shorts - sparking fears of price falls
By Mike Verdin - Published 01/02/2016

Hedge funds returned to a net long position in agricultural commodities for the first time since before Christmas, driven by short-covering in grains which may, ironically, have set the scene for fresh selling.

Managed money, a proxy for speculators, held a net long position of 11,648 contracts in the top 13 US-traded agricultural commodities, from corn to sugar, as of last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The return to a net long meaning that long bets, which profit when prices rise, exceed short holdings, which benefit when values fall for the first time in a month reflected a hefty turn more bullish in positioning.

The previous week, hedge funds had held a net short of 55,640 lots.

The swing was driven by short-covering in grains of more than 100,000 lots the biggest bullish shift in positioning in seven months helped by factors including a recovery in oil prices, ideas of a surge in South African corn imports, thanks to drought, and talk of Russia constraining grain exports.

'Reload on the short side'

The swing bullish was particularly evident in Chicago corn futures and options, in which hedge funds slashed their net short to some 87,000 lots.

Speculators' net longs in grains and oilseeds, Jan 26 (change on week)

Chicago soyoil: 48,549, (+9,002)

Kansas wheat: -16,509, (-2,918)

Chicago soybeans: -30,456, (-4,683)

Chicago soymeal: -38,322, (+8,944)

Chicago wheat: -50,699, (+19,759)

Chicago corn: -87,197, (+71,013)

Sources: Agrimoney.com, CFTC

"Managed funds had, by last Tuesday, cut their short position by a chunky 70,000 [contracts] in the past week," said Tobin Gorey at Commonwealth Bank of Australia.

However, the extent of the short-covering, ironically, raised concerns that funds would use the retreat since mid-January from elevated levels of bearish bets on grains as creating scope to put in fresh ones.

US broker Benson Quinn Commodities flagged the potential for the data to prove "a bearish catalyst moving forward, as the funds will have the capability to reload on the short side".

Funds tend to get unnerved when net short, or net long, positions are at historic highs as they were early last month, when the net short in position in grains, including the soy complex, hit a record top.

'Could be supportive'

For wheat too, the extent of position covering, with hedge funds now holding their smallest net short in two months, may have created room for fresh sales.

Speculators' net longs in New York softs, Jan 26 (change on week)

Raw sugar: 118,308, (-35,426)

Cotton: 27,317, (-1,143)

Cocoa: 19,495, (-2,082)

Arabica coffee: -23,251, (+2,068)

Sources: Agrimoney.com, CFTC

"The size of the Chicago position does not look supportive," Benson Quinn Commodities said.

However, the broker was less downbeat in soybeans, in which managed money increased its net short, by 4,683 lots.

The data "showed funds adding to shorts last week," the broker said.

"This could be supportive going into Monday and the new month."

'Smashing up the furniture'

In New York-traded soft commodities, hedge funds renewed a trend of bearish bets, cutting their net long position by more than 36,000 lots to 141,689 contracts, the lowest in nearly four months.

Speculators' net longs in Chicago livestock, Jan 26, (change on week)

Lean hogs: 29,845, (+5,657)

Live cattle: 12,825, (-3,110)

Feeder cattle: 1,743, (+207)

Sources: Agrimoney.com, CFTC

The shift reflected mainly a spree of cutting bullish positioning in raw sugar futures and options, which many traders said reflected more macro-economic than sector-specific concerns, with China - whose slowing GDP growth is a major worry the top sugar importer.

And, with sugar futures extending declines since, on Monday touching a four-month low of 13.04 cents a pound, speculators appear to be continuing their liquidation.

"We have all known that the 'elephant in the room'," that is, the large fund net long position in sugar, "could start smashing up the furniture at any time," said Marex Spectron, the London broker.

Out of a 'deep hole'

In cocoa too, speculators extended a selldown of their net long, driving it below 20,000 lots for the first time in nearly nine months, amid improved output prospects in the key West African producing countries, Ghana and Ivory Coast.

Meanwhile, in the livestock complex, hedge funds extended their net long above 44,000 contracts for the first time in three months, led by bullish positioning in Chicago lean hogs, which have proved one of the top performers in commodities so far this year, appreciating by 10.0%.

The price improvement has been attributed in part to a decrease in the US slaughter rate, from 2.50m head in the week ending December 19 to some 2.3m head, and to retailers focusing on pork their marketing campaigns.

"Hog prices dug a deep hole at the end of last year, a direct result of the sharp increase in the number of hogs showing up at processing plants," said Paragon Economics and Steiner Consulting.

"That situation is slowly normalising."

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