Hedge funds cut their bearish bets in agricultural commodities to a four-month low as they found a taste for cocoa – although the extent of their purchases in the bean raised concerns of selling pressure ahead.
Managed money, a proxy for speculators, reduced its net short position in futures and options in the top 13 US-traded agricultural commodities, from cattle to corn, by 46,179 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The move cut the net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain - to 80,202 lots, the lowest since late July.
And it reflected in particular a further retreat in negative positioning in the top four New York-traded soft commodities, in which purchases exceeded sales by nearly 77,000 contracts, the largest such shift since October last year.
Mills sell forward
This net buying was led by raw sugar, in which hedge funds slashed their net short by 57,880 contracts, reducing it to a three-month low, amid ideas that supplies from India’s huge stockpile may not be forthcoming for now.
“That fall is hefty,” said Tobin Gorey at Commonwealth Bank of Australia, although noting that hedge funds still had a substantial net short in the sweetener, of more than 138,000 lots, which could inspire further upwards pressure on prices if closing of these positions continued.
However, he noted too “just how much has been sold by producers”, with separate data on commercial investor positioning showing them lifting their gross short by 44,400 contracts week on week, the largest such hedging spree in more than a year.
“The commercial sector absorbed most of this [hedge fund] buying,” Sucden Financial said, itself considering the data “bearish” for sugar price prospects, “as it means there is now less to cover on the speculative position and also shows the determination of producers to benefit from any rally”.
‘Demand currently very strong’
But also in softs, hedge funds expanded their net long in New York cocoa futures and options by 15,528 lots to 60,818 contracts – the largest in five years, spurred by ideas of strong demand.
Jack Scoville at Price Futures, saying that “Ideas are that demand is currently very strong”, added that “it seems that the market is short cocoa for the demand even through arrivals have been stronger so far this season from West Africa”.
Societe Generale said that “cocoa prices are currently elevated on the back of a lower balance, between a tightening supply and cocoa processors and chocolate companies saying they expect a strong demand, particularly in Asian markets.
New York cocoa is “still on a roll, with $427m in bullish flows” for the week,
However, SocGen also flagged that this buying represented “an unusually high amount for a second week in a row, leading the commodity to go deeper into overbought territory”.
The bank already cautioned last Monday that cocoa was “extremely overbought”, after attracting “$416m in bullish flows” for the previous week, including the London contract.
ADM Investor Services also cautioned last week that “cocoa has built up a sizable net speculative long position that leaves the market vulnerable to long liquidation and profit-taking.
“A negative shift in global risk sentiment could put cocoa back on the defensive.”
‘Biggest surge in price in four years’
SocGen also cautioned that New York arabica coffee had been “pushed into overbought territory”, with managed money shrinking its net short in futures and options to a four-month low as of Tuesday.
Arabica coffee also last week saw its “biggest two-day surge in price in four years on the back of a tightening of supply”.
However, by contrast, in grains, including the soy complex, hedge funds expanded their net short, by nearly 33,000 contracts to 70,450 lots.
Chicago corn and soybeans attracted much of the net selling, of more than 12,000 lots apiece, as the US harvest ticked along, raising supplies available for sale.