Hedge funds raised bullish betting on agricultural commodities to a 19-month high, thanks to “brutal” short-covering in raw sugar as well as buying on expectation of a China-US trade deal.
Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities by 64,006 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The buying drove the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 326,796 contracts, the highest since June 2018.
It extended a remarkable switch in ag positioning by hedge funds, which four months before held a net short of more than 680,000 tonnes.
China import hopes
The change in investment strategy has reflected in part the increased prospects of a phase one China-US trade deal, as signed last week, which stands to take to $80bn or more, over two years, China’s ag purchases from the US.
In soybeans, a big US export to China in normal times, managed money was a net buyer for a fifth successive week, a spree which has seen them turn from a net short of more than 110,000 contracts to a net long of 6,290 lots.
In wheat, of which China is also expected to make notable purchases of US supplies, hedge funds raised their net long in Chicago soft red winter wheat to the highest in six months.
In Kansas City wheat, the main US export variety, the speculator net long rose to a 14-month high.
‘Expectation for modest volatility’
Among New York-traded soft commodities, managed money raised its net long in cotton, of which the US also stands to receive substantial Chinese orders, above 30,000 contracts for the first time in more than a year.
Louis Rose at Rose Commodity Group noted also that “the trade remains net writers of options against current crop contracts”, a factor which “suggests an expectation for modest volatility over the near- to medium-term”.
Volatility is one of the key determinants of options value, with larger price swings making it more likely that any particular strike price will be reached.
But the biggest switch bullish in net positioning - of more than 64,000 lots – among ags for the week was seen in raw sugar, a commodity, a market not sensitive directly to China-US trade.
The CFTC report showed a “huge increase in the net long”, said Marex Spectron, seeing it a reversal of the “wall of selling” which had been a sugar market feature late last year.
“We knew that that wall could only be broken if the funds bought back massively and persistently - we just didn’t think it would happen so soon and so brutally,” the commodities house said.
In fact, Marex said it might have expected the CFTC report to show “even more [buying] given the flat price rise” of 0.73 cents a pound in New York raw sugar futures over the week.
‘Futures should rise’
Sucden Financial said that the CFTC figure “came in at the very bottom end of the market expectations for the additional long net speculative length in the tape.
“Perhaps this explains London strength this morning,” with London white sugar for March nudging 0.2% higher to $399.70 a tonne on Monday.
New York raw sugar futures, of which there is no trading on Monday thanks to a US holiday, should on Tuesday “open higher and test the recent high at 14.57 cents a pound, as the market’s perception is the funds have room to buy more in the short term”.
However, Societe Generale, estimating at $1,03bn the "bullish flow" into raw sugar over the week, took a more caitious view, saying that the shift "moved sugar from overbought to extremely overbought on a one-year observation window and to the overbought box on a two-year window".
Separate CFTC data showing producers selling heavily into the sugar price rally, with the gross commercial short in raw sugar futures and options hitting a four-year high of 629,964 lots as of last Tuesday.