Hedge funds covered a stack of short bets in wheat – but not nearly as many as they took out the previous week, raising questions as to whether this positioning might provide further support to prices.
Managed money, a proxy for speculators, cut its net short position in Chicago wheat futures and options by a little over 19,000 contracts in the week to last Tuesday, data from the Commodity Futures Trading Commission showed.
The figure answered a key question for grain investors, which could have a big impact on short-term pricing – how significantly did hedge funds u-turn after, in the previous week, raising their net short position at the fastest pace on record, to the equivalent of some 7m tonnes of the grain?
That selldown was seen as having left hedge funds over-exposed in bearish wheat bets - given weather worries to crops in the likes of Australia, the former Soviet Union and the US – and spurred a 6.4% rise in Chicago wheat futures last week, the best performance in nearly four months, on ideas of short covering.
"Analysts and others who monitor this sort of thing were shocked to find that their predictions [for the managed money wheat short position] were about 2.75m tonnes out," traders at a major commodities house said.
"As a result, the market rose strongly."
But have hedge funds covered enough short positions to defuse such worries?
The reduction of 19,002 lots in the net short in Chicago soft red winter wheat in the week to last Tuesday reversed only part of the 35,740-contract increase the week before.
And in Kansas City-traded hard red winter wheat, they raised their net short to 12,320 lots, the highest in nearly six months, and the third biggest on records going back to 2006.
"This activity helps explain why the Kansas-Chicago wheat spreads have blown out to historically wide levels," said US broker CHS Hedging.
On Friday, Kansas City wheat, which usually trades at a premium thanks to its higher protein content, saw its discount to Chicago wheat top $0.30 a bushel December basis, one of the weakest readings on a spot contract basis in eight years.
In fact, there was still some doubt over whether funds had covered enough of their short position to neutralise concerns, with Benson Quinn Commodities saying that "the wheat market… is still holding the funds hostage in their short".
"Given a slightly firmer technical structure, I would not be surprised the see additional short covering" early this week, the Minnesota-based broker said.
The rally in wheat futures last week saw Chicago's December contract close on Friday above its 100-day moving average for only the second time in three months.
Chicago wheat for December stood 0.2% lower at $5.20 a bushel in early deals on Monday, with Kansas City hard red winter wheat for December making up some ground in adding 0.1% to $4.94 ¼ a bushel.