Ideas grew that grain markets are vulnerable to a spike higher in prices, even as ideas waned over the susceptibility of sugar futures to such a bounce, following data on hedge fund positioning.
Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities, from cotton to hogs, by 26,359 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The shift took the net short –the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – to more than 117,000 contracts.
And the move was down entirely to increased bearish betting on grains, which rose to its largest in four months, with speculators reducing sell bets on soft commodities, and raising bullish positioning on livestock to the biggest in three months.
‘Big crops get bigger syndrome’
Indeed, in Chicago corn futures and options, hedge funds raised their net short above 200,000 contracts for the first time in five months, amid growing expectations for the US harvest yield, and forecasts for a rise on Thursday in the US Department of Agriculture’s estimate for the figure.
“‘Big crops get bigger’ syndrome is corn’s biggest problem” in price terms, said Benson Quinn Commodities, referring to a Chicago adage that changes in crop production forecasts tend to trend in one direction over the course of a growing season.
However, the extent of the short bet raised some ideas that prices could be vulnerable to a jump higher if funds are provoked into a spree of covering these positions, and with expansion of the US harvest easing pressure on values from that score.
“Large fund shorts are providing support and hope for bounces,” said ag advisory group Water Street Solutions.
In the wheat complex, hedge funds raised their net short in Chicago-traded soft red winter wheat above 100,000 lots for the first time in five months.
And in Kansas City hard red winter wheat, the managed money net short hit a 14-month high of 21,393 as funds sold down in the contract for a 16th successive week – by far the longest selling spree on data going back to 2006.
Benson Quinn Commodities estimated funds as “too short” in Chicago wheat, adding that “they are too short Kansas City, if they are too short Chicago”.
“These numbers should support the market” early this week in price terms, the broker said.
By contrast, in New York-traded raw sugar, speculators sliced their net short position by more than 31,000 contracts, the biggest sell-down in nearly a year, and easing concerns that values are vulnerable to a spike in prices fuelled by fund short-covering.
“The fund net short has returned to manageable proportions,” said Marex Spectron, adding that “the threat of a massive short-covering rally is now fading away”.
Hedge funds also reduced bearish bets on New York cocoa for an eighth successive week, amid improved hopes for demand, the longest shift positive in positioning for three years.
And in arabica coffee, managed money reduced its net short for the first time in a month, although the position remained close to a record high.
Indeed, Societe Generale said that arabica coffee was “oversold” and “vulnerable to short covering”.
‘Vulnerable to profit taking’
In the livestock complex, SocGen restated ideas that the feeder cattle contract had been “overbought”, making it “vulnerable to profit taking” and downward pressure on prices.
However, betting on rising values of feeder cattle, on which hedge funds have their largest number of gross long positions on data going back to 2006, has proved a winning strategy for speculators.
Chicago feeder cattle futures for November closed on Friday at 160.875 cents per pound, the highest finish for a spot contract in 19 months.
Values have been supported by continued strong demand for feeder cattle from feedlots, which in turn have seen a bounce in values of live, or fattened, cattle, which in turn have (for December delivery) bounced 19% from an August low.
Water Street Solutions said that last week had been a “big” one for live cattle prices, in both US cash and futures markets, “thanks to continued strong demand”, with a “big kill pace and big demand environment”.
On feeder cattle, Steiner Consulting said that “the pace of cattle moving into commercial feedlots this year has been brisk, to say the least,” with volumes up 13% year on year in September, lifting to 6% the pace of increase over the July-to-September quarter as a whole.
“A continuation of feedlot placements increasing at the rate seen in the summer would result in the highest annual placements of the decade, slightly exceeding the totals of 2010 and 2011.