Investors were cautioned over the potential for a rally in corn prices, after hedge funds raised bearish betting on the grain to a record high, while taking a less negative view on sugar and wheat prices.
Managed money, a proxy for speculators, cut its net short position in futures and options in the top 13 US-traded agricultural commodities, from hogs to cocoa, by 37,346 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
However, not all contracts saw a shift more bullish in positioning, with hedge funds raising their net short in Chicago corn futures and options by nearly 25,000 contracts to 230,556 lots, the highest on data going back to 2006.
Indeed, the extent of the net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – exceeded a previous record which had held for 20 months.
’US corn uncompetitive’
The selling came in a week in which the US Department of Agriculture raised its estimate for this year’s US corn harvest yield to a record high, enhancing ideas of strong world supplies of the grain, and touch rivalry between export sellers.
Societe Generale said: “Fundamentally, US corn remains uncompetitive in the export market, and record inventories continue to weigh on prices,” which last week set a contract low of $3.36 ¼ a bushel for Chicago’s December lot.
However, extreme short, or long, holdings on ags also provoke concerns of a sharp reversal in prices, should hedge funds be prompted to close these bets for reasons such as a change in the weather outlook, or an unexpected demand surge.
‘Risk of price rebounding’
“On the short term… there is nevertheless a risk of price rebounding higher should short money managers decide to cover their positions”, SocGen said, terming managed money “by far the most erratic component in the US corn market”, with producers more predictable in their exposure.
Water Street Solutions said that funds’ record net short corn position was “providing some rally fodder”, although adding that “excessive US corn supply and long farmer position will keep a lid on rallies this winter unless a real South American production problem is found”.
Corn, and soybean, investors in particular are keeping a close eye on weather patterns in Brazil and Argentina, amid expectations of a La Nina, which can cause unduly dry weather in parts of both countries.
Benson Quinn Commodities flagged rumours of Chinese import orders of corn, and ethanol, as a potential spark to higher prices, with talk of the purchase of “5-10 corn and 12-18 ethanol cargos”.
“If the China rumours prove true, fund money exodus could pick up,” meaning a close of short positions and higher prices.
In Chicago soybeans, funds “were a bit shorter this afternoon than trade expected”, the broker added, for a week in which the USDA also produced a modest surprise by leaving its estimate for the US yield in essence unchanged, rather than cutting it as investors had expected.
“Year-to-date, money manager positioning has grown increasingly more responsive to newsflow and consequently more erratic,” SocGen said.
By contrast, in wheat, Benson Quinn Commodities flagged the potential for short-term pressure on prices, after the CFTC data showed “funds covered bigger portion of net shorts than expected” in the latest week.
For Chicago soft red winter wheat, hedge funds cut their net short by more than 16,500 contracts to 108,576 lots.
For Kansas City-traded hard red winter wheat, the net short was reduced by 13,102 contracts to 10,424 lots – the first move bullish in positioning since mid-July, ending a record long net selling spree on the contract.
Less short on sugar
Among New York-traded soft commodities, managed money cut its net short in raw sugar futures and options even more dramatically, by nearly 50,000 lots, the biggest swing positive in positioning in two years.
More bullish thinking was “supported by continuously increasing ethanol prices in Brazil”, said Rabobank, although Marex Spectron urged caution over expecting the short-covering wave to continue.
Speaking of the prospect of managed money turning net long in sugar, for the first time since April, the trading house said that “we can see only two factors which could sustain the market action which would cause them to - weather and/or energy.
“The probability of this happening has diminished slightly… because of the improved rainfall outlook in Centre South Brazil, and of indications that the shine may have gone off the rally in crude oil.”
‘Vulnerable to short covering’
In New York-traded arabica coffee too, hedge funds cut their net short too, by the most in nearly two months, amid something of a recovery in prices, fuelled by worries over a Brazilian export downturn.
Still, values remain close to contract lows, and SocGen restated an assessment that prices are “oversold” and “vulnerable to short covering”.
The data also underlined the extent to which producers are staying away from the market at weak values, with the gross commercial short in arabica coffee, at the lowest in more than two years.
Meanwhile, in the livestock complex, hedge fund sales exceeded purchases for the first time in 10 weeks, as prices fell back, with hogs bearing the brunt of the selldown.
Indeed, Chicago lean hog futures shed 4.8% over the week to last Tuesday, “as weekly production remains heavy and an expected expansion in the US hog herd continues”.