Hedge funds turned bearish on agricultural commodities en masse, undertaking their biggest switch short in positioning on record, led by grains – in which they may ironically have boosts the chances of price gains.
Managed money, a proxy for speculators, slashed its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 232,217 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The cut in the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – was the largest on records going back to 2006.
And it meant that hedge funds - which in the first six weeks of the year doubled bullish bets on ags to a net long position nearly 800,000 contracts, amid a popular play of inflation expectations meaning higher commodity values - have now reversed back to a net long of 384,635 lots.
That is nearly exactly where they started 2017.
In fact, the commodity play has proved disappointing, undermined in part by the failure of inflation fears to ignite, and weaker oil prices, besides – until recently – a stronger dollar, which cuts the affordability of dollar-denominated asset such as many raw materials.
Speculators' net long in Chicago grains, Mar 14 (change on week)
Soybeans: 98,354, (-29,288)
Soymeal: 59,944, (-1,589)
Kansas wheat: 25,230 (-9,875)
Soyoil: 784, (-25,580)
Corn: -23,602, (-103,683)
Chicago wheat: -100,629, (-37,499)
Sources: Agrimoney.com, CFTC
Agricultural commodities themselves, as measured by the Bcom ag index, have fallen by 6.1% in a month.
In the latest week, hedge funds focused selling in particular on grains, including the soybean complex in which they shrank their net long by more than 207,000 contracts - again a record selldown.
Bearish sentiment was encouraged by US Department of Agriculture figures on March 9, in the so-called Wasde report, which showed bigger-than-expected estimates for South American corn and soybean crops.
"Higher-than-expected South American output estimates pressured the grains and oilseeds complex, while Brent crude lost 8.9% week on week," Rabobank said, explaining "heavy pressure" on ag markets.
Indeed, in Chicago corn futures and options, hedge funds swung net bearish by more than 100,000 contracts for the first time on record.
Speculators' net longs in New York softs, Mar 14, (change on week)
Cotton: 105,608, (-426)
Raw sugar: 90,503, (-29,046)
Arabica coffee: 5,392, (-3,388)Cocoa: -31,671, (+1,033)Sources: Agrimoney.com, CFTC
In Chicago soybeans, managed money cut its net long below 100,000 lots for the first time since January, while in soyoil coming within an ace of returning to a net short position.
And in Chicago wheat futures and options, they undertook their biggest selldown in 11 months, to take their net short position back above 100,000 contracts.
'Looks supportive to prices'
However, the extent of the selling raised ideas that hedge funds may have overplayed their hand – creating scope for fresh long positions, and upward pressure on prices.
Speculators' net longs in Chicago livestock, Mar 14, (change on week)
Live cattle: 99,854, (+2,705)
Lean hogs: 47,307, (+1,417)
Feeder cattle: 7,561, (+2,948)Sources: Agrimoney.com, CFTC
"I would take a good look at the selling evidenced on [the CFTC data] and expect to test higher values."
In corn in particular, "a bullish catalyst appears managed money will have the ability to add substantial length", the broker said, adding that this was a dynamic that "could get interesting moving into spring planting".
In New York-traded soft commodities too, hedge funds cut their net long position, by 31,827 lots, taking it to the lowest in 11 months, and with particular selling focused on raw sugar.
Managed money net long in top 13 US-traded ags and (change on week)
Mar 14: 384,635, (-232,217)
Mar 7: 616,852, (-51,236)
Feb 28: 668,088, (-122,900)
Feb 14: 796,016, (+118,149)
Feb 7: 677,867, (+30,597)
Jan 31: 647,288, (-90,364)
Sources: Agrimoney.com, CFTC
In arabica coffee, meanwhile, hedge funds cut their net long to a nine-month low of 5,392 contracts, amid reports of decent weather for Brazilian arabica coffee output, with even cotton seeing some selling too, taking the speculative net long in the fibre a touch below its record high.
By contrast, cocoa bucked the trend, seeing some buying after a wave of bearish bets which had driven New York prices to a nine-year low, on a nearest-but-one contract basis.
"The increasing likelihood of an El Niño, which correlates with lower cocoa production, has put bullish pressure into the market," Rabobank said, with El Nino seen as often bringing dry weather to West Africa, besides South East Asia.
Hedge funds turned more bullish on the Chicago-traded livestock complex too, by more than 7,000 contracts, reflecting buying in both cattle and lean hogs.
"Cash cattle trade and better packer margins have supported the futures trade," said ag advisory group Water Street Solutions, if cautioning that history suggests that a rally in prices from multi-year lows set in October may soon run out of steam.
"Typical seasonal topping can be found in late March. Supplies for now look ample into summer."
By contrast, in hogs, Water Steet Solutions flagged the prospect of "seasonal support" to prices that "should help to offset ample supplies as summer approaches".
By Mike Verdin