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Hedge funds wrong-footed on sugar bets, cautioned over cattle

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Hedge funds extended bearish bets on agricultural commodities, helped by a record net short in arabica coffee, and selling in sugar which is looking like a strategy in which they are piling up losses.


Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by 20,312 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.


However, the relatively small shift in the headline number for the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain - disguised some landmark figures for individual contracts.


In New York traded arabica coffee, for instance, hedge funds extended their net short to 45,989 contracts - the largest on records going back to 2006.


Selling in coffee futures has been encouraged by rains in Brazil which have eased concerns that a strong blossoming period ahead of the 2018 crop would not be reflected into substantial numbers of cherries for harvesting.


‘Covered shorts with gusto’


In New York raw sugar, hedge funds raised their net short to 107,248 contracts, one of the largest on record, in a swing likely to have left many with losses, given a recovery in prices.



New York’s March raw sugar contract touched 14.75 cents a pound on Monday, the highest for a spot lot in nearly three months, and taking the lot above its 200-day moving average – implying that most short bets within that timescale are showing a paper loss.


In fact, short-covering by funds was seen by some investors as a major cause of a 3.7% jump to 14.63 cents a pound in prices on Friday.


“Investors, heavily short, were the predominant buyers,” said Tobin Gorey at Commonwealth bank of Australia.


“Short investors have been the most likely buyer for some time now. And they did so with gusto.”


Funds vs producers


Meanwhile, separate CFTC data showed sugar producers revived their appetite for sales in the latest week, with the commercial short rebounding some 12,500 contracts from a level in the previous week which was the lowest since late 2011.


Indeed, trading house Marex Spectron restated an analysis that the dynamic represented a “silent tug of war between the funds, who are very short, and the producers who are very long (unpriced)”.


Sucden Financial said that with open interest, ie the number of live contracts, in raw sugar little changed even as funds have short, “we must assume… short-covering by funds and speculators meeting renewed pricing by producers” as values rose.


“We suspect that this will be a continuing pattern as we reach higher and try and test 15 cents a pound and the recent highs at 15.18/20 cents a pound.”


‘Rather impressive’


Among grains, there were some caution too that funds may have got ahead of themselves in short bets, with Benson Quinn Commodities, for instance, saying that the “fund position in Chicago looks modestly supportive” to prices.


Hedge funds in the latest week raised their net short in Chicago wheat nearly to 84,000 lots, with substantial managed money bets, either short or long, raising concerns that prices are liable to a correction if speculators are tempted into closing such holdings.


The broker also termed “rather impressive” a selldown in soybeans, in which funds cut their net long by nearly 19,000 contracts.


Indeed, Terry Reilly at Futures International said that “funds were more short than expected in corn, a lot less long in soybeans, shorter than projected in Chicago wheat”, in the latest data.


A weaker-than-estimated fund long position could be deemed bullish, in signalling that more selling pressure than thought has already been undertaken.


‘Vulnerable to profit taking’


However, a shift more bullish still in Chicago-traded cattle prompted Societe Generale to heighten a caution of potential selling to come.


In live cattle futures and options, “net position increased by the largest amount since March” in the latest week, with hedge funds raising their net long by more than 8,000 contracts to a three-month high.


“Sentiment on cattle prices remains strong on the back of robust global beef demand for beef, rising exports from the US and lower fodder costs,” the bank said.


However, SocGen said that the buying had left live cattle “overbought”, and “vulnerable” to a sell-off.


In feeder cattle – animals yet to be fattened for slaughter - the bank noted that “money managers’ position on futures is the largest since 2006, and the commodity remains vulnerable to profit taking”.


On futures and options combined, hedge funds in fact trimmed their net long position in feeder cattle in the latest week from a position the previous week which was the highest on data going back to 2006.

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