Hedge funds raised their bullish betting on agricultural commodities to a fresh 19-month high, led by sugar and wheat – although may wish they hadn’t given the fall in prices since on concerns over the spread of coronavirus.
Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities by 52,586 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The buying, spurred by the signing of the phase one China-US trade deal, took the net long –the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 379,382 contracts, the highest since May last year.
However, the turn positive in strategy has not been rewarded, so far, with prices as measured by the Bcom ag subindex down nearly 3% since last Tuesday, undermined by disappointment that the trade deal has not sparked an immediate Chinese buying spree of US ags, and by fears over China’s coronavirus outbreak.
“Everything in the commodities basket got slapped on Friday and continues to drop today on the weight of the coronavirus fears,” said Sucden Financial.
“Grains, energies, softs, you name it” have suffered selling.
Sugar rally melts
This includes the main New York-traded soft commodities – arabica coffee, cocoa, cotton and raw sugar - which attracted fund net buying of more than 55,000 lots in the latest week, driving the speculative net long in the complex nearly to 235,000 contracts, its highest since February 2017.
The buying spree was led by sugar, in which funds raised their gross long position to 230,000 contracts, the highest since 2016 - encouraged by factors such as stronger energy markets and declining expectations for output in Thailand, for which Czarnikow has forecast a drop of 30% in cane output year on year.
Societe Generale, highlighting "concerns about a large market deficit going forward", noted that "sugar mills in Indonesia, the world largest sugar importer, were reported to be running out of raw sugar to process".
However, raw sugar futures have fallen by 2.4% since last Tuesday, undermined by the worries over coronavirus which have sparked a particularly rapid reversal in oil prices.
‘Balloon has popped’
“While coronavirus could potentially have longer term demand implications for agri commodity demand if an epidemic emerges, the more immediate transmission to the complex has been via oil prices and related biofuel demand,” said JP Morgan.
“Crude has declined and broken its trend line,” said Marex Spectron, noting particular drops in the price of gasoline in Brazil, implying lower values of ethanol, and in turn undermining prices of sugar, which competes with the biofuel for cane.
“The price of gasoline in Brazil has been reduced by 3% and then 1.5% this week, showing the anxiety of the Brazilian government to keep fuel prices down when possible,” Marex said.
“The sugar balloon has popped,” said Sucden Financial.
Wheat price reversal
Also among soft commodities, prices of cocoa – in which hedge funds raised their net long by more than 14,000 lots in the latest week, amid worries over West African weather - have retreated, standing 2.4% below levels last Tuesday.
Among grains, meanwhile, hedge funds turned buyers most notably of wheat, in which they raised their net long in Chicago soft red winter wheat futures and options to a 16-month high of 41,671 contracts, and for Kansas City hard red winter wheat to a 14-month top of 10,692 lots.
However, US wheat prices, which had been supported by gains in French and Russian values, have fallen since last Tuesday, by 3.7% for Chicago wheat and by 4.4% for Kansas City, undermined by the broad market downturn, and ideas that China had bought the grain from Australia rather than the US.
Speculators have proved more profitably positioned in corn and soybeans, in which they have retained net short positions.
Nonetheless, JP Morgan said that the price setback represented a chance for fresh purchases, flagging “opportunities to extend coverage into longer dates.
“We maintain a bullish outlook across agri commodities on contractionary fundamentals and an improvement in demand for US agri products from China towards the end of the first quarter of 2020.”
The bank recommended a bet of going long in Chicago May corn futures, noting strong cash prices in the US, and a surge in Brazilian values “to seasonal record high levels”, after an extensive 2019 export campaign drained stocks.
With dryness encouraging a “weather premium” in Argentine prices too, “the US is the most competitive export origin and sales are surging as a result.
“Along with strong domestic demand and old crop production issues not yet fully priced, we continue to see upside ahead for Chicago corn futures.”