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Hedge funds 'may have overreacted' in record wheat sell-down
By Mike Verdin - Published 18/04/2016

Hedge funds again cut their bullish positioning on ags, led by the largest sell-down in wheat on record – so big it has, ironically, left many investors looking at losses despite them making the right call on US weather.

Managed money, a proxy for speculators, cut by more than 22,000 contracts its net long position in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.

The drop took the net long – the extent to which long positions, which benefit when prices rise, outnumber short bets, which profit when values fall – to a one-month low of 155,749 contracts.

And it was led by selling in Chicago wheat futures and options, in which hedge funds raised their net short by more than 38,000 lots – the biggest sell-off on records going back a decade.

'Significantly improving moisture'

The selling was encouraged by rains in the US Plains which have eroded concerns over the threat of dryness to winter wheat, which landed up to 4.6 inches of rain on some areas over the weekend, and are expected to continue this week.

Speculators' net longs in New York grains, April 12 (change on week)

Chicago wheat: -106,163, (-38,425)

Kansas wheat: -20,355, (-9,247)

Corn: -136,705, (+25,160)

Soybeans: 100,216, (+26,475)

Soyoil: 96,441 (-12,278)

Soymeal: -6,691 (+13,526)

Sources: Agrimoney.com, CFTC
"Showers across the region are significantly improving moisture for wheat," weather service MDA said.

The US Department of Agriculture will later on Monday unveil weekly crop condition data, expected to show a far better performance than a week ago, when the proportion of domestic winter wheat rated "good" or "excellent" was shown declining by 3 percentage points.

Short bets overegged?

However, the extent of the scramble by hedge funds for short bets has raised ideas that the position has been overdone, and even raised the threats of higher prices if speculators are encouraged to close some of their holdings.

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

Raw sugar: 122,623, (-28,862)

Cocoa: 25,174, (-536)

Cotton: 8,348, (+14,460)

Arabica coffee: 7,137, (-5,844)

Sources: Agrimoney.com, CFTC
The managed money net short in Chicago wheat, at 106,163 lots, was not far short of the record 111,409 contracts set in May last year.

Broker Benson Quinn Commodities, flagging the record increase in the net short in Chicago wheat, said that "I doubt [funds] get away with that regardless of the weather".

CHS Hedging said that "if and when the speculators change direction and start to cover, the short could make the wheat market very dynamic".

Already, many recent short investors are out of the money, with Chicago wheat futures for May standing at $4.63 ¼ a bushel in early deals on Monday, more than $0.04 a bushel above the average price for the past 10 days.

Oil vs meal

Hedge funds also cut noticeably their net long position in soyoil, encouraged by a retreat in prices of rival vegetable oil palm oil, and by wetness in Argentina, the top soymeal exporter, which in cutting soybean production prospects has eroded hopes for supplies of the feed ingredient too.

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

Lean hogs: 43,464, (-3,594)

Live cattle: 23,926, (-1,192)

Feeder cattle: -1,666, (-1,775)

Sources: Agrimoney.com, CFTC
Rabobank flagged that soymeal prices "rallied 6% week on week, on the unwinding of recently amassed short meal/long oil spreads and a wet Argentine harvest".

And in New York raw sugar, they cut their net long too, by nearly 29,000 contracts, eroding a net long position which many investors feared was top-heavy, and fuelling a 7% drop in prices over the week.

"For once the [CFTC data] was in line with market movements," said London-based broker Marex Spectron, while adding that the net long "must be expected to be back… around its current historic highs for the move" given the 6% rebound in futures on Friday.

'Almost to standstill'

However, hedge funds turned markedly more upbeat on Chicago soybean futures and options, taking their net long above 100,000 lots for the first time since June 2014, encouraged by the Argentine crop worries.

Oil World has forecast rains could cost more than 3m tonnes of production, adding that the "soybean harvest came almost to standstill due to severe flooding".

And in New York, cotton too saw buying, with managed money turning net long in the fibre for the first time in two months, thanks to the biggest week for buying of 2016.

A more bullish take has been encouraged by the wet weather in the US Plains, and further east into the cotton belt, which, while helpful for crops already in the ground, has provoked concerns for spring sowings of the fibre.

'Not as buoyant'

In the livestock sector, hedge funds cut their net long for a third successive week, the longest losing streak since November, and reflecting in particular a cut in bullish hopes for Chicago lean hog futures and options.

"As with cattle, the mood in the hog complex is not as buoyant as it was in mid-March," Paragon Economics and Steiner Consulting said in a report.

"Cash prices have failed to advance as rapidly as some expected, in part because wholesale price have been range bound for the last two months."

The wholesale US pork value, the so-called "cutout", stood at $78.16 a hundredweight late last week.

"The expectation/hope in early March was the cutout values would at this point be well above $80, justifying base hog values above $70," the report said.

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