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Hedge fund 'herding' leaves Chicago wheat vulnerable to sell-off


Wheat has been rendered particularly vulnerable to a sell-off in Chicago by the extent of buying it has attracted from funds, a series of commentators said – even as futures tumbled amid raised coronavirus concerns.


Across the top 13 US-traded agricultural commodities overall, managed money - a proxy for speculators - lifted its net long position in futures and options by 32,615 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.


Chicago soft red winter wheat attracted particular buying, with hedge funds raising their net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall - by 18,775 contracts to 64,715 lots, the most in 18 months.


The gross number of long positions, at 143,987 lots, was the highest on data going back to 2006.


‘Potential herding behaviour’

The buying reflected investor concerns of “a drought in Australia slashing output prospects”, Societe Generale said, with the official Abares bureau last week cutting further its estimate of the country’s latest wheat harvest.


Bullish sentiment has also been spurred by “growing worries about the next European harvest, as heavy rain delays planting amid good demand”, and with the first official French crop ratings of 2020 revealing a relatively low crop condition score for winter wheat in the EU’s top producing country.


However, the extent of the buying has “pushed wheat into overbought territory”, SocGen said, warning that the latest data were “hinting at potential herding behaviour” by funds – a dynamic, which if put into reverse, could lead to a selling surge.


‘Even more bearish tone’

Other commentators too cautioned over the extent of fund buying in wheat, with Richard Feltes at Chicago broker RJ O’Brien saying that the “sizeable managed fund long in wheat looks especially vulnerable”.


Agritel contrasted the extent of positive positioning in wheat with the negative bets managed money has in other grains, saying that while “financial funds are already [net] short in soybean and corn, they could sell off a part of their long position in wheat”.


However, Benson Quinn Commodities termed the CFTC data “bearish the grains and soybeans” overall, given that in the latest week corn and soy too had attracted net buying.


“Adding in today’s increased fear, and uncertainty of coronavirus Friday’s [CFTC] report takes on even more bearish tone to markets today,” the broker said.


It also noted that funds had hedged “some of that risk” in Chicago soft red winter wheat through short bets on Minneapolis spring wheat, in which they raised their net short by more than 5,000 lots to 11,981 contracts.


‘Record bullish flow’

Chicago wheat futures, which for May delivery lost 3.0% at one point, indeed proved a prime target of selling on Monday, as revived coronavirus worries sent prices of many risk assets lower.


Brent crude stood 4.9% lower in afternoon deals, a tumble of 4.8%, while shares lost 2.8% on Wall Street, for the S&P 500 index, 3.7% in London and 4.3% in Frankfurt.


By contrast, the safe haven of gold stood up 1.8% at $1,673 per ounce, earlier touching a seven-year high of $1,688.7 per pound – spelling gains for the funds who poured into the metal en masse in the week to last Tuesday, notching up their “the largest ever long-building flows into gold” equivalent to $7.43bn, according to SocGen.


The week’s “record bullish flow reflects a growing expectation that the Fed could cut interest rates to offset any shock to the US economy from the coronavirus and its larger economic impact, with the market buying gold as a hedge against an economic slowdown”, the bank said.


‘A little more bullish’

Funds were also notable buyers, among ags, of raw sugar futures and options in the week to last Tuesday, of 17,610 lots, driving their net long to a three-year high of 166,397 contracts, amid waning supply expectations.


“Effectively the overall sugar situation has got a little more bullish, with estimates of Thai sugar production falling, so that it now looks as if even 9m tonnes is optimistic,” said Marex Spectron.


“And estimates of the Pakistan and Mexican crops are falling too.”


Sucden Financial said that “the ‘sugar story’ continues to give a window of opportunity for the price action to trade higher as we await fresh news from Brazil… to which destinations are seemingly becoming increasingly dependent on considering dry weather in the main Far East origins”.


‘Positive rains’

However, in cotton, they cut their net long by 2,451 lots to 31,429 contracts.


And in arabica coffee, hedge funds proved net buyers for an eighth successive week, matching the longest such spree on record, this time extending their net short by 2,794 contracts to a three-month high of 16,655 lots.


The selling has been encouraged by growing expectations for Brazil’s 2020 harvest, with Cepea reporting that “the rains that hit Brazil in the first fortnight of February were positive” to both arabica and robusta crops in major producing regions, “favouring the bean-filling stage.


“Although precipitation was high in some locations,” with reports of flood damage to some plantations, Cepea contacts did not report “significant damage to crops.


“Thus, the 2020-21 crop is expected to have a high number of large-sized beans and good yield at processing,” and is also forecast to enjoy a timely start to harvest too.

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