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Cattle, soy targeted amid funds' $15.5bn coronavirus selling spree


Cattle and soybeans joined industrial metals and oil in being targeted in hedge funds’ initial round of commodity selling on coronavirus concerns, but the likes of grains and cotton escaped.


The onset of jitters over the spread of coronavirus provoked heavy speculator selling in futures and options in major commodities in the week to last Tuesday, with Societe Generale estimating the “large bearish flow” at $15.5bn, “on both long liquidation and short building”.


The estimate is based on Commodity Futures Trading Commission data showing changes in investor positioning in major US-traded ag contracts in the week to last Tuesday, including switches in holdings by managed money, a proxy for speculators.


Energy contracts, with copper, bore at $11.9bn the brunt of the selling on worries that “reduced travel due to regulatory bans or simply fear of contracting the virus should greatly reduce demand for refined products such as jet fuel”, and with concerns centring on China, a huge consumer of energy and industrial metals.


“Factories in China have extended their new year shut down, and the longer they remain closed, the larger the curb on copper demand,” SocGen said.


‘Demand greatly reduced’

However, some agricultural commodities suffered significant selling too, with the bank blaming the virus outbreak too for a 19,175-contract net selldown in Chicago live cattle futures and options, the largest such move in eight months.


In feeder cattle, those yet to be placed on feedlots and fattened for slaughter, net selling totalled 5,705 contracts, the most on records going back to 2006.


In China, the lunar new year “usually witnesses strong meat consumption as Chinese families gather for festive meals containing large portions of expensive meats such as pork and beef”, the bank said.


“Demand was greatly reduced due to the coronavirus.”


‘Aggressive buyers’

Among crops, the Chicago soy complex suffered a notable bearish shift in managed money positioning too, with soybeans themselves attracting net selling of 37,220 lots, the second biggest such shift in nine months.


With this extent of selling already undertaken, “I would be surprised to see them add many more shorts in soybeans,” Benson Quinn Commodities said.


However, that hedge fund buying and selling overall was nearly even for the week – with a net shift bullish in positioning of just 1,934 lots – parts of the complex attracted notable purchasing too.


In Chicago soft red winter wheat, they raised their net long by some 6,800 contracts to 48,469 lots the most in 17 months, while in corn they cut their net short by 38,328 lots, the most in eight months.


Benson Quinn Commodities said that funds “were aggressive buyers in corn, which may limit the buying interest from other specs”, given the extent of purchasing already undertaken.


At Futures International, Terry Reilly noted that corn buying had come while "money managers sold a good number of soybeans, so unwinding of soybean-corn spreads could have been a feature".


‘Good reasons for higher prices’

Among the main New York-traded soft commodities too, hedge funds were broadly buyers, arabica coffee being the exception, attracting net selling of 11,252 lots amid growing confidence in a large Brazilian harvest this year.


In cotton, the managed money net long rose by 7,534 lots week on week to 36,541 contracts, the most in 13 months, despite being exposed to China, the top consumer and importer of the fibre.


In raw sugar, hedge funds raised their net long to 145,494 contracts, the most in nigh on three years, amid production concerns which are boosting expectations for the world output shortfall in 2019-20.


Commerzbank, besides noting that the Indian Sugar Mills Association is “talking of a 26% decrease for the season so far” in Indian sugar output, said that “production in Thailand is likely to hit a nine-year low and in the EU to remain close to the previous year’s low level.


“There are plenty of good reasons for higher prices, in other words, even if the sluggish global consumption growth is having a dampening effect on the price on the demand side.”


‘Possible crop disaster’

Marex Spectron noted “extraordinary premium for Thai raws”, of 1.60-1.65 cents a per pound, a feature which “shows that traders are scared of a possible Thai crop disaster”.


There are worries too that “Asian demand is beginning to suck in western hemisphere sugars, thereby diminishing supplies” the sweetener available for delivery against March futures.


For resolution, “a lot will depend on what turns out to be the truth about the Thai crop – will it be 10m tonnes, or 11m-12m tonnes?” the commodities house added.


The CFTC data also showed a jump in forward sales by mills taking advantage of higher prices, with the commercial gross short at 708,063 lots as of Friday, the most since 2016.


Sucden Financial said that “producer selling continues to be evident on rallies, especially as the Brazilian real continues to weaken,” boosting the value in local terms of assets such as sugar traded internationally in dollars.


In fact, sugar prices “are still almost at four-year high prices in Brazilian real terms, and Brazilian producers are taking advantage”.

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