Hedge funds slashed bearish bets in agricultural commodities at their quickest pace in four months, casting a negative pall over prices of some contracts, in showing considerable short-closing potential already used up.
Managed money, a proxy for speculators, narrowed its net short position in futures and options in the top 13 US-traded agricultural commodities by 132,635 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The shift cut the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain - to 422,325 contracts, the lowest in seven weeks.
And it represented the largest such shift since June, and reflected a more positive take on prices for all three ag complexes - grains, livestock and softs.
‘Surprised most of the market’
Indeed, the extent of the short-covering exceeded investor forecasts for some commodities, including New York raw sugar, in which managed money cut its net short in futures and options by more than 37,000 contracts.
The CFTC’s “report surprised most of the market with the bigger-than-expected reduction in the net spec short,” Sucden Financial said.
The trading house also rated as unexpected the “reduction in the commercial long”, as trade investors “took a profit”, with their gross long falling by more than 42,000 lots.
“Will the trade continue to sell to the funds, seems to be the pertinent question,” Sucden said, although raw sugar prices slumped by 2.55 to 12.43 cents a pound in morning deals, in a decline attributed in part to appreciation of the extent of the fund short-covering that had already taken place.
Similarly, for New York cocoa too, in which speculators hiked their net long by 18,747 lots - the fourth-largest such figure on data going back to 2006 – prices fell back on Monday too.
The December lot stood down 2.8% at $2,406 per tonne, finding support at its 100-day moving average $2 lower.
The declines came against a backdrop of weakness in many risk markets, amid waning confidence of a breakthrough in US-China trade talks.
‘May be short too much’
By contrast, among grains, Chicago corn posted small gains after investors were shown to have cut their net short in futures and options by 33,716 lots, a smaller reduction than some had expected.
“The trade may look at their corn buying as not as much as anticipated,” Benson Quinn Commodities said.
“They may be short too much corn and Kansas City wheat.”
On soybeans, however, the broker proposed that the trade may view the cut in the net long of nearly 33,000 lots, to 8,730 contracts, “as more than anticipated”.
Societe Generale highlighted the role of improving expectations, during the week, of US-China rapprochement in trade as fuelling the short-covering in ags.
“Trade war tensions de-escalated, with China applying new waivers, resulting in tariff-free trade for US agricultural products,” the bank said.
“This boosted positive money manager flows in both grains (+$2.3bn) and livestock (+$523m),” with soft commodities, bar cotton, not vulnerable to China-US trade flows.
In Chicago live cattle futures and options, speculators undertook their most bullish week in positioning for a year, to return to a net long position, encouraged too by unusually strong US cash cattle prices, compared with futures values.
Steiner Consulting noted that the basis, October contract, was “wide all summer.
“The five-year average suggests the month of August on a weekly basis has a positive basis between $1.00-2.50 per hundredweight, while this August’s basis calculations were as high as $6.19 per hundredweight,” with basis, unusually, remaining positive in September too.