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Funds extend retreat from bearish ag bets - but sugar, hard wheat miss out


Hedge funds extended their net buying spree in agricultural commodities to the longest since early 2018, backed by hopes of a China-US trade deal, and despite sugar and hard winter wheat missing out.


Managed money, a proxy for speculators, reduced its net short position in futures and options in the top 13 US-traded agricultural commodities by 39,168 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.


That represented a sixth successive week of purchases exceeding sales in the complex, matching the longest such streak since March 2018.


It reflected in particular buying in grains, in which hedge funds returned to a net long position for the first time since July, back by extensive buying in Chicago soft red winter wheat and in soybeans.


‘Too long’

In soybean futures and options, hedge funds extended their net long position by nearly 20,000 lots to 68,822 contracts, the largest in 16 months, amid improved ideas of a trade deal between the US, a major exporter of the oilseed, and China, the top importer.


“Five weeks earlier they were net short 41,700 contracts,” said Terry Reilly at Chicago broker Futures International, adding that “the impressive move was more or so headline driven amid China-US trade development”.


However, the extent of the buying raised some concerns that it had run its course for now, and that hedge funds may slow down on further purchases.


“Given recent technical developments, it feels like they are too long beans,” said Benson Quinn Commodities.


“Funds may own too many beans.”


‘Could justify short covering’

In Chicago soft red winter wheat too, Benson Quinn Commodities raised concerns that hedge funds “may have bought too much”.


Managed money was a net purchaser of 22,663 lots of the grain during the week, to return to a net long position for the first time since August, with buying spurred by a series of tenders by importers such as Egypt, Saudi Arabia and Algeria.


The buying in Chicago soft red winter wheat contrasted with selling in Kansas City hard red winter wheat, in which hedge funds expended their net short to 25,871 lots - a figure which raised some ideas of being excessive.


“I don’t believe they are too short Kansas City, but that would be the one market that one could justify seeing some short covering,” Benson Quinn Commodities said.


Some commentators have flagged the potential for outperformance by Kansas City wheat on other grounds, given its historically large discount, of more than $0.90 a bushel, against Chicago wheat – which, being the lower protein variety, typically trades the cheaper of the two.


At that level of discount, “it may be cheaper to deliver Kansas wheat against the Chicago contract in some instances”, Rabobank said two weeks ago, forecasting the “spread coming back down toward $0.60 a bushel”.


‘Looks less nasty’

New York-traded raw sugar also missed out on the fund buying, with hedge funds hiking their net short by more than 30,000 contracts to 222,723 lots – the second largest on data going back to 2006.


“Their selling is confirmation that momentum had turned negative again” in the week to last Tuesday, said Tobin Gorey at Commonwealth Bank of Australia, although also highlighting some recovery in prices since.


“The momentum picture looks less nasty than it did midweek,” he said.


‘Inflection point’

In New York cotton, meanwhile, managed money reduced its net short for a fourth successive week, with prices of the fibre, a major US export to China in normal times, also vulnerable to influence from the course of trade talks between the two countries.


With a net short of 4,629 lots, the lowest since April, “their position is now virtually flat”, said Ron Lee at US-based McCleskey Cotton, adding that this had left the market “at an inflection point.


“The speculator must decide which net position they are inclined to take,” either going into a net long position, or rebuilding a net short holding, “while the US producer must decide what price is acceptable for their remaining production”.


He added that “we still feel there is a lot of cotton in the country that is unhedged and the market has a real ceiling because of that fact”.

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