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Hedge funds retreat from record bullish ag bet, amid bond, currency turbulence


Hedge funds sold agricultural commodities at their fastest pace of 2021, with grains leading the selldown, amid the tumble in Brazil’s and the financial market turbulence stemming from bond sales.


Managed money, a proxy for speculators, in the week to last Tuesday retreated from its record net long position in futures and options in the top 13 US-traded agricultural commodities, cutting it by 42,529 contracts, analysis of data from the Commodity Futures Trading Commission shows.


That represented the largest cut in three months in the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices decline.


And while all three ag complexes sustained net selling, it was grains, including the soy contracts, which bore the brunt, with a cut in the managed money net long of 34,626 contracts.


Nor did trade investors buy into the rally, with the number of long positions held by commercial buyers, such a processors and millers, falling by 75,244 lots to 1.77m contracts, separate CFTC data showed.


That was also the lowest figure of 2021, although with soft commodities here targeted the most, attracting their weakest coverage level in five months from commercial investors.

Bond market rout

The selling came amid a negative week overall for agricultural commodities which, while on February 25 hitting their highest since July 2017, as measured by the Bcom ag subindex, by the end of the week had fallen by 2.8% from that level.


The CFTC data show that, from a fund perspective, the net selldown reflected in the main liquidation of long positions (rather than purchases of short holdings), in a period for which volatility stemming from a bond rout prompted investors to withdraw cash from many markets.


This exit encompassed commodities even though, ironically, the bond reversal reflected reflation concerns which are typically viewed as a positive for raw material values.


Real factor

However, ags also suffered a dent from a retreat in Brazil’s real attributed to factors such as worries over the South American country’s growing Covid-19 problem, and economic setbacks, besides over the potential for state interference, after President Jair Bolsanaro removed the chief executive of Petrobras.


The real tumbled by 4.3% over the week to last Tuesday, undermining the value of ags, such as corn, coffee, soybeans and sugar, in which the South American country is a key player.


In fact, the CFTC data also showed funds raising their net short position in Brazil’s real on US futures markets to the highest since November.


‘Fairly explosive situation’

Chicago corn and soybean derivatives, and New York sugar, indeed suffered notable selldowns by managed money during the week.


However, New York arabica coffee avoided the selling, with hedge funds raising bullish bets on the bean by a net 2,693 contracts to a five-month high of 37,876 lots, amid growing worries over the hit to Brazil’s harvest this year, and even in 2022, from drought.


Sunny Verghese, the chief executive of ag trader Olam International, underlined the concerns on February 26, saying that “given the terrible weather we’ve had in Brazil, we expect the 2021-22 and the 2022-23 crop to be significantly lower, and that could result in a very sharp structural deficit in the arabica market.


“We could see much higher arabica prices,” he said, viewing a demand recovery stemming from the rollout of Covid-19 vaccinations as adding to a “fairly explosive situation” in the market.


Brazil’s arabica harvest prospects for 2022, in being an “on” year in the country’s cycle of alternative higher and lower production years, are viewed with particular importance by investors.


‘Roasters will need to buy in size’

By contrast, commercial investors allowed their gross long in arabica futures and options to drop for a 13th successive week, to 70,174 lots, the lowest since September 2017.


Marex Spectron even before the data cautioned that commercial “coverage is now low”, in terms of forward pricing of arabica needs, leading the prospect of strong support for dips in prices.


“Roasters will need to buy in size on dips,” the broker said, underlining that “there is little doubt that the market will see good industry buying on dips”.


In the New York cocoa market, the contrast proved even more stark, with the commercial long falling to 60,618 lots – its lowest in six years – even as hedge funds provide unusually strong buyers, of a net 13,450 contracts.


Indeed, cocoa "saw an unusually large $371m bullish flow" into futures and options, Societe Generale.


"The bullish mood was fuelled by growing optimism on the demand side as vaccine rollouts progress steadily," with chocolate consumption having been undermined the hit to impulse buying dealt by Covid-19 lockdowns.

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