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Hedge funds miss the mark betting on rising grains

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The concerns over weather setbacks to US winter wheat, and to spring corn sowings, drove hedge funds to take a more bullish position on agricultural commodities, although sentiment on cocoa declinesd sharply.

Managed money, a proxy for speculators, raised its net long position in futures and options in the top 13 US-traded agricultural commodities, from coffee to lean hogs, by more than 56,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The return to more bullish positioning followed three weeks of speculators cutting their net long position – the extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall.

And it was led by growing bets on rising prices of Chicago grains, as prospects for US production of winter wheat was hurt by further dryness in the southern Plains, while corn plantings were held back by too much rain, and cold, in the Midwest.

Prices retreat

However, hedge funds did not hit the mark in their strategy, with the ramp up in net long position in corn, by nearly 28,000 contracts to 264,391 lots, preceding a sharp drop in prices.

Speculators' net longs in grains and oilseeds, Apr 29, (change on week)

Chicago corn: 264,391, (+27,756)Chicago soybeans: 168,876, (+3,725)Chicago soymeal: 75,203, (+1,910)

Chicago wheat: 42,590, (+15,500)Kansas wheat: 35,538, (+23)

Chicago soyoil: 34,723, (+4,989)Sources:, CFTC

However, a turn more benign in the Midwest weather outlook, with more of the dryness farmers need for fieldwork, and warm weather needed to foster germination, sent corn futures down more than 4% over the following three sessions.

And the extent of hedge funds' net long position may fuel a further decline, if they are tempted to cut back their net long position.

'Steady drop of prices'

The corn net long of 264,391 lots," doesn't even include the other reportables" section of CFTC report, which some also count as indicating speculators, and shows a net long of a further 71,028 contracts, one US broker said.

"This is a total of 1.677bn bushels of corn, most of which is stacked in the July contract.

"If we progress through the planting window without further issue we could see the steady drop of prices as the market takes the fear premium back out."

Wrong target

While wheat futures performed much better - as a re-escalation of tensions in Ukraine, a major grain exporter, added to US crops concerns – hedge funds backed the wrong contract.

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

Raw sugar: 120,503, (+453)Cocoa: 57,743, (-7,347)Cotton: 61,901, (+4,653)Arabica coffee: 41,267, (+2,404)Sources:, CFTC

It was futures in hard red winter wheat, the variety at the centre of dryness concerns, which did better, as a much-watched tour of Kansas, the top US wheat-producing state, revealed worse damage than investors had expected.

Kansas City wheat for July closed the week with its best finish in 15 months, raising its premium over Chicago wheat to $1.05 ¾ a bushel, up 23% since Tuesday's close.

However, speculators raised their net long in Kansas City wheat by just 23 lots in the preceding week.

'Weather favourable'

Among soft commodities, hedge funds raised their net long positions in cotton and sugar, and in arabica coffee, in which they were close to being their most bullish in six years, over concerns about the impact of Brazil's drought on output from the top producing country.

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

Live cattle: 136,312, (+2,499)

Lean hogs: 71,069, (-565)Feeder cattle: 14,911, (+294)Sources:, CFTC

"Weather in Central West Africa continues to be favourable for both mid-crop and the main crop," said Sterling Smith at Citigroup, adding that hedge funds' still relatively large net long position "continues to provide an overhang to the market".

Buying ahead?

Marex Spectron also noted technical reasons behind cocoa's weakness.

Still, Eric Sivry, head of agri options brokerage at London-based Marex, said that bullish sentiment had not disappeared, with El Nino indicators, such as the ENSO, showing a high likelihood of an El Nino, linked to dry weather in West Africa.

"Many players still firmly believe in the long-term structural cocoa deficit / ENSO scenario and will be keen to load up at lower levels," Mr Sivry said.

"Some of the bulls would actually be quite happy for the market to drop by another £50-£75 a tonne [in London] or $100-$150 a tonne [in New York]."


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