Hedge funds rebuilt bearish bets on arabica coffee close to a record high, fuelling caution of a price spike ahead, even as they cut short positions on ags overall, including on the likes of corn and sugar.
Managed money, a proxy for speculators, reduced its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to cotton, by 16,712 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The reduction shrank the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – to 40,902 lots, the smallest in nearly two months.
However, the overall trend less negative in positioning concealed significant disparity between contracts, with livestock and arabica coffee, for instance, suffering fresh selling.
Supply vs demand
Indeed, in Chicago-traded livestock futures and options, managed money cut its net long position by more than 20,000 lots – the biggest selldown in four years, reflecting ideas of ample supplies which provoked mid-month price declines in both hogs and cattle.
That said, prices, in particular of lean hogs, have since revived, presenting fresh gains to funds which stuck with long bets.
On lean hogs, “fundamentals continue to lean bearish but the market continues to suspect demand may step in a pick up the excess,” said Water Street Solutions, noting a similar dynamic in cattle too.
Here, “the general outlook is a bearish supply situation but seasonal strength could keep a bid under the market,” the ag advisory group said adding that the “lowering of Chinese [beef] import tariffs could help US export demand”.
‘Running out of dry powder’
The data showing livestock selldown follow a caution last week from Societe Generale that both live and feeder cattle contracts were “overbought” and “vulnerable to profit taking”.
The bank restated a similar warning this week for arabica coffee, after the CFTC report showed hedge funds rebuilding their net short to 47,299 contracts, back within 1,700 lots of the record high set earlier this month.
“The data suggest the market may be running out of dry powder,” the bank said, noting also that the “number of short money managers increased by 5 to 94 entities, the most ever recorded”.
This also signals that “it is unlikely many more funds can establish new short positions”.
‘Potential for a sharp rally’
Indeed, arabica coffee “is vulnerable to short-covering should any fundamental driver warrant higher prices”, Societe Generale said.
The comments followed a caution from Sucden Financial too that “there remains potential for a sharp rally in coffee futures if we see a surge in short covering”.
Funds hold a “highly exposed short position”, the trading house added, saying that “recent price action in coffee”, trading within range of multi-year lows, “may have been significantly exaggerated due to these high levels of speculation.
“We expect this volatility will persist over coming months.”
‘Less short than expected’
By contrast in New York-traded raw sugar futures and options, managed money turned net long for the first time in seven months, amid a rally which last week took prices to their highest since May.
And in grains, hedge funds curtailed bearish bets, largely in Chicago corn, in which they cut their net short by 20,090 contracts from the record 230,556 lots set the previous week.
Indeed, funds were “less short than expected” in corn, said Terry Reilly at Futures International, a dynamic which can be deemed bearish for prices, in showing more scope for selling than had been thought.
In Chicago wheat, speculators extended their net short marginally, but kept it, at 108,666 contracts, well below the record of 162,327 lots reached in April, leaving room for fresh selling.
“New lows for the move have the potential to attract more fund selling,” broker Benson Quinn Commodities said.