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Hedge funds wrong-footed by vegoil rally - and by rebounding real

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Hedge funds have taken profits in agricultural commodities – but in the wrong contracts, with sales in the likes of arabica coffee and soyoil too soon to benefit from latest price rises.

 

Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities by 29,528 contracts in the week to last Tuesday, data from the Commodity Futures Trading Commission show.

 

That cut the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 1.49m contracts, more than 60,000 lots below the record high set in late February.

 

And it reflected net selling in both grains and soft commodity complexes, with positioning in livestock largely unchanged overall.

 

Soyoil selldown

In grains, the biggest net selling, of 8,507 lots, was seen in Chicago soyoil futures and options - even in a week in which the best-traded May contract soared 7.8%, setting a series of eight-year highs for a nearest-but-one lot.

 

Indeed, the net long in soyoil was “less than expected”, said Terry Reilly at Futures International, noting that it had fallen for consecutive weeks even “while soyoil futures traded higher”.

 

Futures in the vegetable oil has continued to appreciate, rising for May by a further 3.9% since Tuesday, boosted by ideas of improved demand - fostered by the retreat in many countries of Covid restrictions, besides by a recovery in crude oil prices, important for ags used in making biofuels.

 

The US Department of Agriculture last week, noted improved US soyoil exports, and “strong levels” of demand for the vegetable oil for making biodiesel, at 1.25bn pounds in the October-to-December period, up 32% year on year.

 

Real factor

Funds missed out on some headway in soft commodities too, selling down New York arabica coffee futures and options by the most in five months – ahead of a 3.3% gain in the best-traded May futures contract since Tuesday.

 

While worries over Brazil’s dryness-tested arabica crop appear to have stabilised, prices of assets in which the country is a major player have gained support from a rebound in its currency, the real, on expectations of a 0.5-point rise this week in its key lending rate, the Selic.

 

Indeed, the currency move has supported prices of raw sugar too, up 2.0% since Tuesday - gains foregone by funds which sold out in the previous week, in which managed money cut its net long in the sweetener to a five-month low of 194,068 contracts.

 

Besides the boost to prices from the strengthened real, Marex Spectron on Monday said that for sugar “we sense that consensus is shifting to the bullish side”, with next month bringing the start of the Brazil Centre South 2021-22 cane crush, which will show the extent of crop damage from dryness, and with the country facing logistical tests too.

 

‘Non-bearish, but perhaps disappointing’

In New York cotton too, hedge fund net selling of 8,200 lots in the week to last Tuesday – the biggest selldown in a year – has preceded a recovery in prices, of 2.7% since then.

 

Dr John Robinson, at Texas A&M University, noted the incentive to sell in the week to March 9 provided by factors including a “non-bearish, but perhaps disappointing”, US Department of Agriculture Wasde report, which did not cut the forecast for US stocks at the close of 2020-21 as much as had been expected.

 

Furthermore, he highlighted “weakening Chinese cotton prices”, with Zhengzhou cotton for January closing on Monday at 15,760 yuan a tonne, down 4.0% so far this month.

 

However, he noted as supporting prices “stronger export sales” of US cotton, which the USDA in its latest weekly report showed up by more than one-quarter week on week, at 224,000 running bales.

 

Limit raised

The data come ahead of a relaxation as starts this week on CFTC limits on speculative positions in many agricultural commodities, lifting the ceilings on the level of lots which can be held specifically in spot contracts, as well as in all contracts combined.

 

For corn futures, the limit will expand from 33,000 per fund to 57,800 lots all months, for soybeans from 15,000 lots to 27,300 lots, and for wheat to 19,300 contracts from 12,000 contracts.

 

The increase has, coming at a time of historically bullish position in ags, provoked some idea of extra purchasing pressre, with Benson Quinn Commodities sating that “with CFTC raising speculative positions limits… a big dose of new buying is expected”.

 

However, Mike Mawdsley at First Choice Commodities, while noting that “the thinking is funds will just jump in and buy more”, added: “Perhaps. What if they don’t?”, with raised volatility a potential outcome.

 

“The expectation is that higher position limits will lead to higher volatility, with perhaps higher highs and lower lows in the months ahead,” said Arlan Suderman, chief commodities economist at StoneX.

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