This year began with the biggest swing positive in speculators’ positioning on agricultural commodities since 2012 – but it is not clear yet that this was driven by the sector’s improved long-term appeal to funds.
Managed money, a proxy for speculators, cut its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to cattle, by 54,001 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The shift, bar the strong start to 2012, represented the biggest swing net bullish in positioning to start a year on data going back to 2007.
And it came it continued talk of funds looking more favourable on commodities, and agricultural ones in particular, for reasons such as perceived undervaluation compared with equities, and expectations of rising inflation and dollar weakness.
‘Uptrend in agri commodity prices’
Indeed, JP Morgan underlined that “the new year has indeed brought the conductive conditions required to support an uptrend in agri commodity prices through 2018, after poor performance last year”.
The investment bank itself flagged an outlook of “mounting weather related production risks, in an above-trend global growth environment with rising energy prices”.
However, the shift positive was largely dependent on two contracts – New York-traded raw sugar, in which funds slashed their net short by nearly 38,000 lots, and arabica coffee – which are expected to enjoy a short-term buying spree from index funds, in the annual reweighting process.
In this exercise, which is expected to begin this week, index funds readjust their portfolios to the weight of the index followed – meaning buying laggards of the past year, and selling the best performers.
‘Reweighing provided support’
Rabobank, while highlighting that the CFTC data showed a “bullish week for softs markets to begin 2018”, underlined that the sugar shift was fuelled by “expectations of support coming from the January index reweighting”.
In arabica coffee, “as in sugar, the impending index reweighing… provided support”, as did strength in the Brazilian real, which boosts the value of assets in which the South American country is a major player.
JP Morgan, saying that the rebalancing process would be “constructive” for agricultural commodity prices overall, said that raw sugar is set to see “the largest buying” from the exercise, in terms of the number of contracts that index funds stand to buy, compared with open interest – ie the number of live contracts overall.
For raw sugar, the 49,600 contracts that index funds following the S&P GSCI and Bcom indices should purchase represents 6.8% of open interest, on JP Morgan calculations.
“Arabica coffee is also a primary beneficiary, picking up index buying equivalent to 3.9%” of open interest, the investment bank added.
‘Winterkill became a concern’
Among grains, Kansas City hard red winter wheat looks the biggest target of index fund buying, on relative terms, with buying equivalent to 3.6% of total open interest, on JP Morgan calculations.
And, indeed, the grain contract also saw a more positive trend of betting too by hedge funds, which cut their net short in Kansas City wheat futures and options by 5,461 lots in the latest week, from the record high set as of December 26.
The short-covering was also attributed to a worries over winter wheat crops in the US, where “a cold snap in the southern Plains drove managed money to cover shorts as crop winterkill became a concern”, Rabobank said.
Still, the trend was reflected more in Chicago-traded soft red winter wheat, the world’s benchmark wheat contract, in which hedge funds cut their net long by 17,557 contracts to 128,178 lots.
In the livestock sector, a small increase in the net long in the latest week, of 1,048 contracts to 144,522 lots, reflected buying in lean hog futures and options, which more than offset selling in live cattle, and reflecting in part the impact of cold weather on meat supplies.
“Winter weather along all the eastern US was brutal,” said livestock analysts at Steiner Consulting.
“Regarding red meat animal harvest and processing, the pork industry has likely faced the biggest challenges given the location of some major packing plants in that [eastern] region.”
“Cattle slaughter in the impacted states is relatively limited, though transportation of beef to refill the marketing chain to consumers early in the new year has faced transportation issues.”