Hedge funds wrong-footed by sugar price rebound
By Mike Verdin - Published 08/02/2016

Hedge funds returned to a net short position in the main US-traded agricultural commodities, driven by a record swing bearish on sugar – which has begun to appear misjudged, given a revival in prices.

Managed money, a proxy for speculators, returned to a net short holding, of 11,654 lots, in the week to last Tuesday in futures and options in the top 13 US-traded agricultural commodities, according to data from the Commodity Futures Trading Commission.

The return to a net short – in which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – came amid a difficult period for raw materials markets, ahead of a recovery late last week driven by a weaker dollar.

"Demand data look weak," said Barclays, in a note on commodities overall saying that "without an improvement in fundamentals" support to values from the weaker dollar look "unlikely to persist".

And, in ags, the shift negative in positioning was led by soft commodities, for which prices have indeed made a particularly poor start to 2016, losing 9.3% over January to represent the worst performer among commodities, according to Societe Generale.

'Easing of El Niño'

SocGen attributed the weakness in prices to improved conditions, and flagged "announcements that the adverse weather-related conditions from El Niño had peaked and expectations of a more favourable weather outlook were likely".

Speculators' net longs in New York softs, Feb 2 (change on week)

Raw sugar: 51,485, (-66,823)

Cotton: 24,841, (-2,476)

Cocoa: 15,052, (-4,443)

Arabica coffee: -13,549, (+9,702)

Sources:, CFTC

This was particularly relevant to cocoa, prices of which slumped by 14.0% last month "due to favourable weather conditions in Ghana following an easing of El Niño conditions", and to sugar, values of which dropped by 13.8% over January, the bank said.

The CFTC data showed hedge funds, in the week to last Tuesday, cutting their net long in New York cocoa  futures and options for a seventh successive week, matching the longest swing bearish in positioning since 2007.

They cut the net long to 15,052 contracts, the lowest in nearly three years.

Paper losses

However, new-found stability in cocoa futures - which stood on Monday at $2,783 a tonne, 0.8% higher than as of Tuesday last week – has raised questions over whether the latest leg of speculators' sell-down was justified.

Speculators' net longs in grains and oilseeds, Feb 2 (change on week)

Chicago soyoil: 50,411, (+1,862)

Kansas wheat: -20,119, (-3,610)

Chicago soybeans: -25,862, (+4,594)

Chicago soymeal: -33,199, (+5,123)

Chicago wheat: -48,685, (+2,014)

Chicago corn: -59,479, (+27,718)

Sources:, CFTC

Commerzbank has raised the potential for longer-term weather effects to dent production from the West African mid-crop harvest, later in the year, and for futures to "find their footing again".

And in sugar – in which hedge funds cut their net long in the week to last Tuesday by 66,823 contracts, their biggest shift bearish in positioning on record – the swing appears at best premature, with futures rebounding by 3.5% since.

Indeed, with speculators having now ramped up gross short bets in sugar to a four-month high of 67,181 lots, many funds are now looking at paper losses.

'In sell mode'

The CFTC managed money data "showed a greater reduction in [funds'] net long… that most people had expected," London broker Marex Spectron said.

Speculators' net longs in Chicago livestock, Feb 2, (change on week)

Lean hogs: 35,828, (+5,983)

Live cattle: 9,300, (-3,525)

Feeder cattle: 2,322, (+579)

Sources:, CFTC

It also flagged a sell-down in raw sugar by index funds, tracked by a separate set of CFTC data, to "below 200,000 lots for the first time since we started tracking it."

The index fund shift is "presumably a reflection of a general feeling that commodity prices are headed south, and the US dollar is headed north", a negative for values of dollar-denominated exports such as sugar, Marex Spectron said.

The broker added that "funds still appear to be in sell mode", although was itself less downbeat on price prospects, saying that "from a fundamental point of view, the situation is more bullish today than it was two weeks ago".

La Niña fears

In grains, managed money continued for a fourth week to curb its net long, led by corn, in which the net short was cut to levels one-third of those in mid-January.

Speculators' total position in US-traded ags and (change on week)

Feb 2: -11,654 contracts, (-23,302 contracts)

Jan 26: 11,648 contracts, (+67,288 contracts)

Jan 19: -55,640 contracts, (+87,632 contracts)

Jan 12: -143,272 contracts, (-53,003 contracts)

Jan 5: -90,269 contracts, (-81,854 contracts)

Sources:, CFTC

SocGen flagged support to corn prices from "reports of La Niña possibly arriving sooner than expected", adding that the weather phenomenon, unlike its counterpart El Nino, "brings drier-than-normal weather to the US, lowering estimates for crop output".

However, for soybeans a cut in the net short of less than 4,600 lots was "a lot less than expected", according to US broker Benson Quinn Commodities.

"This may offer a modicum of support" to futures on Monday, in implying extra short-covering yet to come.

Hogs in demand

In wheat too, short-covering of 2,014 in Chicago soft red winter wheat futures and options was less than expected.

And hedge funds extended their net short in Kansas City hard red winter wheat futures and options by 3,610 lots to 20,119 contracts, within 4,000 contracts of the record high.

Elevated net short, or net long, speculative positions tend to raise concerns that appetite for such bets may be spent, and that the market could be prone to a reversal as positions are covered.

In the livestock sector, hedge funds raised their net long in Chicago lean hogs for an eighth successive week, the longest bullish swing in positioning in two years, amid US slaughter levels which have fallen short of some market estimates.

"From a supply perspective the large year-over-year increases in US pork production for the next few months seems to be behind us," Paragon Economics and Steiner Consulting said in a report.

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