Hedge funds retreated further from bearish bets in agricultural commodities, spurred by “building weather risks” which have prompted in particular a switch in thinking on grain price prospects.
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 sugar, by 109,685 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The drop in the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – was down in the main to a switch in positioning in the main grain and oilseed contracts.
Here, the net short tumbled 100,980 contracts week on week to its lowest in four months.
‘Building weather risks’
Indeed, the less bearish turn in positioning on grains was more than investors had expected, with Terry Reilly at Futures International saying that “funds had positions that were more long than estimated”.
The shift came amid “building weather risks”, Rabobank noted, with cuts in net short positions in Chicago corn and soybean futures and options coming amid mounting concerns over Argentine dryness, worries which rose further on Monday after a drier-than-forecast weekend.
In Kansas City hard red winter wheat, hedge funds swung from a net short position to their longest holding in five months, thanks to the biggest switch bullish in betting since July.
The change in betting came amid worries over spreading drought in the US southern Plains, the epicentre of US output of hard red winter wheat, as the spring growing season approaches.
Funds buy, farmers sell
Large shifts funds’ net long in position can be deemed as a negative sign for prices, curtailing the scope for further buying.
However, negative sentiment this time was eroded by separate data in the CFTC report showing that producers had used higher prices as an opportunity to hedge substantial amounts of crop – so limiting potential for further sales too.
“The commercial took the other side to fund buying, hedging on increased producer selling,” Benson Quinn Commodities said.
“The commercial short in corn and wheat is largest since last summer,” (since August in fact), the broker said, adding that the CFTC report “looks neutral in terms of market direction” for grains.
‘Shift in sentiment’
Among New York-traded soft commodities, hedge funds cut their net short by a more modest 12,326 contracts, with buying in cocoa and raw sugar futures and options offset in part by selling in cotton and arabica coffee.
In cocoa - in which funds returned to a net long for the first time since November - “West African dryness, smaller-than-expected global stocks and an anticipated reduction in Ghanaian new crop prices all contributed to the shift in sentiment,” Rabobank said.
In arabica coffee, a return to an expansion in the fund net short came even as prices rose, boosted by factors including a recovery in the real, which boosts values of assets over which the South American country has a major influence.
Societe Generale restated a caution that the arabica coffee contract was “oversold” and “vulnerable to short covering”.
‘New leg lower’
Managed money turned less upbeat on Chicago livestock even as they cut shorts in grains and soft commodities, with hedge funds cutting their net long in lean hogs by 13,229 lots – the biggest one-week selldown in the contract since 2013.
The selling, which cut the speculator net long in the contract to its lowest in eight months, amid worries over demand, reflected in a reduction last week by the US Department of Agriculture by 70m pounds to 21.9bn pounds in its forecast for US pork consumption this year.
“Domestic demand concerns took the hog market a new leg lower this past week,” said ag advisory group Water Street Solutions.
“Weak cash and soft packer margins are all in the mix.”