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Hedge fund reticence to cover shorts in grains 'bodes well for price rises'

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Commentators flagged the potential for grain and soy price gains after hedge funds were revealed to have covered fewer of their short bets than expected – at a time of growing worries over the dent to North American crop prospects from poor weather.

Managed money, a proxy for speculators, in the week to last Tuesday returned to a bearish shift in positioning on the top 13 US-traded agricultural commodities, lifting their net short by nearly 9,000 lots to 163,141 contracts, analysis of regulatory data shows.

However, the selling was focused on grains, in which hedge funds raised by more than 24,000 lots their net short – a position which means that short holdings, which profit when values fall, exceed long bets, which benefit when prices gain.

In New York-traded soft commodities, speculators turned marginally more positive on positioning, pulling out of an 11-week selldown, the longest on records going back to 2006.

In Chicago-traded livestock contracts, managed money raised its net long position by nearly 13,000 lots to 180,000 contracts – the biggest since September 2014, the data from the Commodity Futures Trading Commission showed.

'Larger-than-expected shorts'

The selling in grains chimes with a long-running theme that ample global grain stocks, after a succession of bumper harvests, have placed market power firmly in the hands of consumers.

Speculators' net long in Chicago grains, May 16 (change on week)

Kansas wheat: 3,541 (-10,511)

Soyoil: -6,008, (+6,843)

Soymeal: -9,688, (-9,651)

Soybeans: -36,523 (-2,188)

Chicago wheat: -121,385, (-13,493)

Corn: -203,909, (+4,733)

Sources: Agrimoney.com, CFTC

However, commentators raised too concerns over the extent of the net short position in grains, given North American rains which are slowing sowings of spring crops, besides provoking concerns over the spread of disease in winter wheat, and early harvest in the US southern Plains too.

Richard Feltes at RJ O'Brien said that the latest CFTC data showed net short positions "larger than expected in wheat and soymeal".

Terry Reilly at Futures international noted that "managed funds for corn are near a record net short".

'Short-covering rally opportunities'

Ag advisory group Water Street Solutions said that, in corn, the "large short position held by the funds will likely provide support and short-covering opportunities on weather scares.

Speculators' net longs in New York softs, May 16, (change on week)

Cotton: 105,091, (+6,297)

Arabica coffee: -13,045, (-2,271)

Raw sugar: -24,393, (-8,445)Cocoa: -36,882, (+6,846)Sources: Agrimoney.com, CFTC

For wheat, the group noted that "funds continue to hold large short positions which will provide fuel for short-covering rally opportunities.

"Look for rally opportunities in Chicago toward $5.00 a bushel," compared with the $4.38 ½ a bushel at which the spot July contract was priced on Monday.

'Looks supportive'

Such thinking was espoused too by broker Benson Quinn Commodities, which said the CFTC data, coupled with chart signals, "looks supportive to corn and wheat" prices.

Speculators' net longs in Chicago livestock, May 16, (change on week)

Live cattle: 129,845, (+3,743)

Lean hogs: 33,285, (+8,992)

Feeder cattle: 16,930, (+158)

Sources: Agrimoney.com, CFTC

And the broker flagged that in soybeans, the data showed that "funds did not cover much of their soybean short on Tuesday's big rally" in prices. Indeed, they raised their gross short position by some 850 lots.

"This may offering underlying support to soybean futures

"I would say this [data] is supportive," Benson Quinn Commodities said, if adding the caveat that factors such as a fresh lurch lower in the real, or improvement in the US weather outlook, could sent soybean prices lower nonetheless.

Cocoa vs coffee

By contrast, in the big four New York-traded soft commodities, hedge funds raised their net long by 2,427 contracts, reflecting optimism over cotton prices, reflected in a price spike following upbeat US export data some 10 days ago.

"Better-than-expected US export data created concerns about supply tightness until the new harvest comes in," Rabobank noted.

The net long in cotton rose to within 1,000 contracts of a record high set in March.

In cocoa, speculators curtailed bearish bets, amid some recovery in prices encouraged by unrest in Cote d'Ivoire, the top producing country, although the managed money net short remained close to record highs.

The buying in these two contracts more than offset further sales in coffee, in which hedge funds built their largest net short position in 14 months, and raw sugar, in which they were net sellers for a 12th successive week.

'Pork is very compe

titive'

Meanwhile, in Chicago-traded livestock, speculators raised their net long in all three contracts – lean hogs, live cattle and feeder cattle - for the first week in two months, in the run-up to the Memorial Day holiday, next weekend, which marks the start of the US grilling season.

Managed money net long in top 13 US-traded ags and (change on week)

May 16: -163,141, (-8,947)

May 9: -154,194, (+35,047)

May 2: -189,241, (+41,965)

Apr 25: -231,206, (-68,232)

Apr 18: -162,974, (-50,324)

Apr 11: -112,650, (-83,231)

Apr 4: -29,419, (-99,680)

Sources: Agrimoney.com, CFTC

"Hog futures have rallied in the last four weeks as market participants come to grips with steady, and rapid, gains in product markets and the spot live trade," said analysis group Steiner Consulting.

"Worries in April about large supplies and the shake-out in the belly market have been replaced by the realisation that [US] pork is cheap, it is very competitive with other proteins domestically and very competitive in the global marketplace."

By Mike Verdin

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