Hedge funds may wish they had had more courage in betting on agricultural commodity price falls.
Managed money, a proxy for speculators, in the week to last Tuesday turned net long in futures and options in major US-traded ag commodities for the first time since September, and thanks to the biggest shift bullish in positioning since July.
However, the building of a net long position of 82,456 lots across the top 13 contracts, amid an early-December price recovery, in fact preceded further declines in values, to historic lows.
As measured by the Bcom agriculture index, ag prices on Monday touched 47.3193, the lowest on data going back to 1991 - and down 2.4% since last Tuesday.
A surge into soymeal - amid worries over dryness in Argentina, the top exporter of the feed ingredient – looks particularly ill-fated.
Hedge funds raised their soymeal net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to a nine-month high of nearly 64,000 contracts as of last Tuesday.
“Weather concerns across South America stimulated buying,” Rabobank said, highlighting that “hot and dry conditions, particularly across Argentina, have increased concerns of new crop stock availability”.
However, Chicago soymeal prices have fallen 5.0% since Tuesday, as Argentina’s weather forecast has turned wetter.
Hedge funds also raised bullish bets in Chicago soybeans themselves, besides curtailing their net short in corn, of which Argentina is also a major grower.
‘Export pipeline starting to fill’
Among soft commodities, hedge funds turned out too quick to cover short bets in arabica coffee, cutting their net short ahead of a drop to fresh contract lows, and with New York futures down 4.0% since Tuesday.
Price declines have been fuelled by a drop in the real, which cuts the value of assets in which Brazil is a major player, and indeed with raw sugar futures down nearly 6% since Tuesday.
However, raising bullish bets on cotton has turned out a winning bet, with prices up 1.4% since last Tuesday, boosted by data late last week showing a rapid pick-up in US exports of the fibre.
“Shipments of almost 250,000 bales was a marketing-year high as the export pipeline is finally starting to fill,” said Ron Lee at US-based McCleskey Cotton.
By contrast, in cocoa, in which hedge funds stuck to bearish betting, returning to a net short for the first time in a month, they have been rewarded too, with prices heading lower still, to a three-month low late last week, although values did recover sharply in early deals.
Indeed, Societe Generale cautioned that its analysis of the fund positioning data suggested that cocoa futures could be reaching an “inflection point”, with the extent of net short reflecting “high-conviction trades by a few money managers”, rather than a broader sell-down.
The bank also cautioned that arabica coffee was “oversold” and “vulnerable to short covering”, as was Chicago-traded corn, and Chicago soft red winter wheat and Kansas City hard red winter wheat.
Broker Benson Quinn Commodities echoed the potential for fund positioning to prove “neutral to supportive” for wheat prices, given that price falls late last week suggested an increase to speculators’ net short positions to elevated levels.
However, prices in fact sank in early deals on Monday, with both soft red winter wheat and hard red winter wheat futures setting fresh contract lows.