Hedge funds extended their bullish betting on agricultural commodities to a fresh record high – this time led by soft commodities, buying strongly in coffee and sugar, and lifting their net long in cotton to a two-year high.
Managed money, a proxy for speculators, lifted their net long in futures and options in the top 13 US-traded agricultural commodities by 52,935 lots in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission shows.
That saw the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – set an all-time high, this time of 1.30m lots, for a second successive week, and further outpace the previous record of 1.24m contracts which stood for a decade.
However, this time buying centred on soft commodities, in which hedge funds raised their net long position by 40,714 lots week on week, the strongest buying pace since August.
‘Monsoons may fail’
Indeed, for the first time in nearly six months, managed money proved a purchaser of all four major New York-traded soft commodity contracts – cocoa, arabica coffee, cotton and raw sugar.
Raw sugar attracted the largest buying interest, of a net 21,426 contracts, helping drive prices to their highest in nearly four years, supported by firmness in oil prices, which boosts values of the ethanol that sugar competes with for cane, and by output worries.
“The Centre South Brazil [2021-22] crop could still be substantially down due to drought,” said Marex Spectron, adding that in Asia, “the monsoons may fail, and there will almost certainly be some minor crop losses due to weather”.
Furthermore, producers are “over-hedged” and “facing margin stress”, thanks to the rise in prices, with the commercial short actually down nearly 20,000 lots week on week to its lowest of 2021, CFTC data showed.
However, the 14,124 contracts that hedge funds bought in arabica coffee was from a historical perspective more significant, representing the biggest buying spree in six months, and driving the speculative net long in the bean to a five-month high.
Purchasing has been spurred by worries over the damage to Brazil’s arabica plantations from a dearth of rainfall late last year, with worries growing that dryness was so significant that it stunted vegetative growth which will be needed for the 2022 crop too.
Meanwhile, in cotton, managed money raised its net long by 3,886 lots in the week to last Tuesday to 72,454 contracts, the largest since August 2018.
The buying offered “speculative fuel” to the rally which drove New York futures to their highest since June 2018 during the week, said Dr John Robinson at Texas A&M University, adding that the purchasing had been helped by signs of “good demand” for US supplies, and rising prices in China.
‘Uncharted seasonal waters’
The strong buying in soft commodities contrasted with a modest appetite for fresh long bets in grains, amid worries that the net long in the complex, close to record highs, may be top heavy and vulnerable to sparking a marked price slump should funds be prompted to selldown.
The CFTC report “shows managed money funds continuing in uncharted seasonal waters, carrying large length into March,” said Benson Quinn Commodities.
“Those positions still offer resistance and limit the markets ability to move higher.”
The net long in grains, including the soy complex, rose by 10,334 lots to 795,765 contracts, as buying in soybeans and Chicago soft red winter wheat more than offset selling in corn and Kansas City hard red winter wheat.
The trades came in a week marked by the US Department of Agriculture’s Outlook Forum, which issued forecasts for 2021-22 US grain balance sheets showing some, although not substantial, recovering in inventories.