Soft commodities suffered particular selling among ags as hedge funds - amid the Covid-19 led markets collapse - extended a “general and non-directional” withdrawal from commodities, potentially spurred by margin calls.
Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities by 67,638 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
However, as in the previous period, the relatively modest cut in the net long – considering the 3.4% drop over the week in prices, as measured by the Bcom ag subindex – appeared to reflect a trend of simple retreat from the sector, rather than positioning to profit from market moves ahead.
While open interest – the number of “live” contracts - rose modestly in ags overall, to 7.64m lots, a proxy for fund positions calculated by a simple tally of managed money long and short bets dropped by 177,000 lots to 1.91m contracts, the lowest since August 2017.
The biggest selling among ags was seen in New York cocoa and raw sugar, the contracts in which speculators had the largest net long position - with particular buying in the likes of Chicago corn and soybeans, in which managed money substantially net short.
It was a trend repeated among commodities as a whole during the week, “with all sectors seeing outflows from both long and short positions”, Societe Generale said.
While commodities experienced a “muted” overall bearish move in positioning, of a net $3bn, this disguised a shift of $15bn overall.
“In aggregate, the market saw a large outflow, with $9.0bn of long liquidation and $6.0bn of short covering,” the bank said.
It added that “this general and non-directional closure of money manager positions could be explained by a need for cash to pay margin calls on other derivatives contracts.
“This would imply that most of the unwound positions had a positive value.”
‘Still selling sugar’
With hedge funds having held, among ags, a particularly large net long in New York-traded soft commodities, it was this area which suffered the most selling.
At a net 100,663 lots, the net selldown in the four main softs contracts – arabica coffee, cocoa, cotton and raw sugar - was the second largest on data going back to 2006.
Marex Spectron said that “in the current turmoil the funds are in the process of liquidating positions.
“That means they are buying what they are short of and selling what they are long of.
“So they are certainly still selling sugar.”
More short bets to come?
The question now for the likes of sugar was whether funds would continue selldowns, and open up net short positions, or merely trend towards neutral holdings.
Marex Spectron said that for raw sugar “they are probably unlikely to initiate new short positions”.
While acknowledging that short investors “the momentum is with them… [funds] may want to get out of everything, and/or they may need the profit on their sugar short to pay for losses elsewhere”.
At Commonwealth Bank of Australia, Tobin Gorey said that “we suspect the investor exit still has another week or so to run, but the end is now in sight.
“And with that position unwound, the sugar market will no longer feel the weight of that selling.”
The result will be “a market that becomes more obviously driven by pricing fundamentals, the path of oil prices in particular”.