Hedge funds turned bearish on agricultural futures and options at a record pace, in a late-2017 selling spree which extended across commodities, and provoked some talk of spurring price recoveries.
Official data for the week to last Tuesday showed “heavy speculative selling across the commodity asset class going into year-end”, Societe Generale noted, flagging “significant selling activity” on a range of contracts, including gold among precious metals, and platinum among industrials.
However, agricultural commodities suffered in particular from the selling splurge, with sales in the top 13-US-traded contracts exceeding purchases by 252,418 lots – comfortably the biggest shift bearish in positioning on data going back to 2006.
The spree set a series of records within the complex, including the biggest-ever sales of Chicago wheat and New York raw sugar futures and options in a single week, and a record net short set in arabica coffee.
In the livestock complex, selling was less extreme, although live cattle suffered its biggest selldown since July 2015.
‘Hard to explain’
Commentators struggled to explain the spark for the selldown, which was accompanied by an increase in open interest in ags – ie the number of live contracts – in a time of year which often sees declines, as investors tidy-up positions ahead of the holiday period.
Rabobank, noting a “very bearish week across commodities”, said that the bearish lunge was “hard to explain on fundamentals alone”.
It flagged the “closure of a prominent soft commodity hedge fund” during the week, with the announcement of the shutdown of Armajaro Asset Management’s CC+ fund, which specialised mostly coffee and cocoa.
The closure of the fund - which was run by Anthony Ward, who earned himself nickname “Chocfinger” for his large bets on the cocoa market - was the latest in a series of exits from the sector, which saw shutdowns exceed launches this year for the first time on records going back to 2000, according to the Wall Street Journal.
There were eight new commodity hedge funds launched compared with 130 in 2011, the newspaper said.
"At some point, owning physical assets instead of equity paper or bitcoin will become in vogue again, but that day is not today," said Tregg Cronin at Halo Commodity Company.
‘Selling was huge’
In raw sugar, in which hedge funds turned net short at a record rate of 82,966 contracts over the week, Marex Spectron likened the selldown to a “sudden storm coming out of a dull grey sky”.
A rise in open interest in raw sugar futures of nearly 62,000 lots over the week, the largest in 18 months, suggested that algorithmic funds were behind the selling.
“It seems clear that… this week saw system funds selling to trade and consumers,” the London-based trading house said.
“Those funds were presumably mainly ‘momentum’ funds, ie followers of short-term trends. And their selling was huge”.
“They seem to have been selling in similar, if less violent, fashion in coffee and cocoa.”
Softs vs livestock
The selling contrasted with net buying the previous week, of some 84,000 contracts, which had returned the managed money position in agricultural commodities – temporarily – to a net long.
But that most bullish shift in positioning was not, largely, rewarded in price terms, with the Bcom agricultural commodity subindex setting a series of record lows last week.
The latest selling left hedge funds with a net short of 169,962 lots in the top US-traded contracts as of last Tuesday, a large although not unprecedented extent of bearish betting, with
the record, of some 318,000 contracts, set in March last year.
However, the overall figure disguised a record net short, of 109,277 lots, in soft commodities, while hedge funds retained a substantial net long, of 171,346 contracts, in livestock.
‘Leaning too short’
The extent of selling among soft commodities, except cotton, and, among grains provoked ideas that prices could be poised for a recovery, as hedge funds are tempted to close short bets and take profits ahead of year end, and before rivals do.
Societe Generale termed Chicago corn, and both Chicago and Kansas City wheat contracts, as “oversold” and “vulnerable to short-covering”, a rating it applied to New York raw sugar and arabica coffee too.
US broker Benson Quinn Commodities said that in grain markets, the CFTC data “should offer support” to prices early this week.
Corn “should be ripe for some modest short-covering”, while adding that for both Chicago and Kansas City wheat “considering that funds added these shorts near contract lows, I believe they are leaning too short”.
‘Lesson of 2017’
Allendale said that “grain markets are technically oversold which suggests a short-covering rally could happen at any time”.
Meanwhile, referring to raw sugar, Marex Spectron said that “we may see a bounce” due to the extent of the net short in the sweetener, although adding that a “lesson of this year is that the funds can stay with a position for much longer than we used to expect”.