Hedge funds’ buyback spree in agricultural commodities stalled as hopes of China-US trade talks bringing big crop purchases turned stale, and despite some retreat by speculators from bearish betting on softs.
Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities by 5,145 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The, small, increase in the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices rise – ended a six-week run of short-covering, which had reduced the position by nearly 500,000 contracts.
As of last Tuesday, the net short stood at 195,816 lots.
The end of the net buying wave came as speculators, having closed their net short in grains, refused to build a net long, proving reluctant to bet too much on a trade rapprochement which would see China return to buying large amounts of agricultural commodities from the US.
‘Could be a negative’
Although hedge funds did prove buyers in soybeans - which are particularly sensitive to Beijing-Washington relations as a huge Chinese import from the US in typical times – net purchasing was limited to 3,503 contracts, albeit taking the speculative net long to a fresh 17-month high.
Indeed, Benson Quinn Commodities said that the extent of the net long in Chicago soybean futures and options “could be a negative” for prices going forward, with large such positions signalling that notable buying pressure has already been factored in.
“If there is a market that they lean too short it is Kansas City hard red winter wheat,” said the broker, with managed money holding a net short of 29,389 lots in the grain as of last Tuesday, contrasting with a small net long in better-traded Chicago soft red winter wheat.
Such positioning has helped drive hard red winter wheat to an unusual, and large, discount to its Chicago peer which, in holding a lower protein content, is typically the weaker-valued contract.
Benson Quinn Commodities also said that funds could also be too bearish on Minneapolis spring wheat, in which their held a net short of 9,362 lots as of last Tuesday, up 1,300 lots week on week.
‘Appetite to be short corn, long soybeans’
Among grains, speculators also extended selling in corn, increasing their net short by more than 9,000 lots – with such positions potentially hedged against soybeans.
“Feels like managed funds continue to have an appetite to be short corn and long soybeans,” said ADM Investor Services.
“Some feel selling in corn is linked in parts to the fact that if there is a partial trade deal between US and China, it may not include US corn or corn byproducts.”
Byproducts of corn’s conversion into ethanol include, notably, distillers grains, a rival feed ingredient to soymeal, which itself encountered net selling in the week to last Tuesday, of 7,841 contracts.
By contrast in soyoil, the other key soybean processing product, hedge funds raised their net long to a two-year high of 75,353 contracts, spurred by the vegetable oil supply squeeze fears most evident in the palm oil rally.
The dampened optimism over a China-US deal spurred a reversal too in short-covering in New York cotton futures and options, with hedge funds returning to being net sellers for the first time since September.
However, in other soft commodities, hedge funds proved net buyers, albeit of a modest 75 contracts in raw sugar, leaving their net short at 222,468 lots, the third largest on data going back to 2006.
“Investors’ huge short position continues to overshadow this market,” said Tobin Gorey at Commonwealth Bank of Australia.
Marex Spectron flagged the potential for sugar to find fuel for a price recovery from funds being “massively short” at a time when the 2019-20 Centre South Brazil cane crush is winding down, meaning less examination of sugar prices against ethanol ones, a key consideration for the region’s mills.
However, Marex said that “doubts about demand, which in turn may reflect negatively on the one thing we can never be confident of – consumption” was curtailing buying pressure.
‘Herd has started to decline’
In the Chicago livestock complex, hedge funds for a sixth successive week proved net buyers in live cattle, raising their net long to a four-month high of 40,467 contracts.
Besides a pull from beef prices, cattle values have also been supported by ideas of some squeeze in supplies ahead, given herd dynamics shown up in US cattle-on-feed data.
“The number of heifers on-feed has been above a year earlier for every count back to January 1, 2016,” said Steiner Consulting, implying pressure on number of female cattle available to breed.
“The recent data raise the likelihood… that the US breeding beef herd has started to slowly decline.”