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Funds hefty soy buying prompts cautions of price 'correction'


The extent of buying in soybean derivatives has left prices vulnerable to a correction, investors were warned, after data showed the oilseed particularly well favoured by funds’ longest buying spree in ags on record.


Managed money, a proxy for speculators, raised its net long in futures and options in the top 13 US-traded ags, from corn to cocoa, by 43,924 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.


That represented an 11th successive week of net buying, the longest on CFTC data going back to 2006, and coming amid ideas of funds viewing the sector as offering protection again a raised inflation threat, at a time of weakening expectations for stocks of many ags too.


“The idea that inflation would rise, driven by rising food prices, has gained traction in recent weeks mainly due to firm food demand, supply disruptions in China and a weaker US dollar,” said Societe Generale


“Since August, the grains, softs and livestock complexes have seen large bullish flows of $17.5bn, $6.6bn and $1.6bn respectively,” the bank said, adding that “part of this might have been triggered by money managers looking to hedge against inflation induced by higher food prices”.


Profitable bets

The latest week of purchasing drove hedge funds’ ag commodity net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to the highest since May 2014.


While buying was seen in all three complexes – grains, livestock and soft commodities – in the latest week, it was grains which attracted the lion’s share, even as the complex approached a much-anticipated briefing on US crop stocks as of September which has a history of prompting price volatility.


In fact, the quarterly US grain inventory briefing, last Wednesday, in showing smaller-than-expected numbers for corn, soybeans and wheat sent prices of all three crops soaring, rewarding funds’ faith in the contracts.


‘Potential for correction’

However, the extent of buying in soybeans in particular raised concerns of reaching such levels that prices of the oilseed could be vulnerable to a sharp reversal, should hedge funds be enticed to sell down that position.


Managed money raised its net long in Chicago soybean futures and options for a seventh successive week, this time to 229,043 contracts, the highest since September 2012.


“The optimism of short-term oriented market participants is already very high, especially for soybeans,” said Commerzbank, noting that the net ling is at its “highest level for more than eight years and only just below the record level recorded at that time.


“This implies a considerable potential for correction.”


‘Bearish indicator’

At Futures International, Terry Reilly said that “with fund positions well more long than expected”, for corn as well as soybeans, “prices are a little more vulnerable for movement to the downside if funds decide to liquidate positions.


“We see this as a bearish indicator.”


In Chicago corn futures and options, hedge funds raised their net long for an eighth successive week, this time by 10,908 lots to 106,820 contracts, getting into six figures for the first time in 14 months.


However, separate CFTC data, on trade positions, showed producers selling into the fund buying in corn and, in particular, soybeans, in which the commercial net short rose to 844,905 lots - a record high. Some consider that a price supportive metric, in showing substantial farmer hedging has already been absorbed.


‘Demand has kept going’

Among New York-traded soft commodities, raw sugar proved particularly popular, with managed money buying more than 20,000 lots to send its net long in the sweetener above 200,000 contracts for the first time in 22 months.


While Brazilian sugar production has exceeded initial expectations, demand for the sweetener, as measured by the country’s shipments “has kept going at more than 3m tonnes per month,” raws and white combined, said Marex Spectron.


“Now, as we come to the final leg of the Centre South Brazil [cane] harvest, it is clear that a ‘comfortable’ stock at the end of the harvest simply is not going to happen.”


‘Selling trend taking root’

However, in arabica coffee, speculators cut their net long by the equivalent of $361m on SocGen calculations, taking close to $700m the net selldown over the past two weeks.


A trend is “taking root” of selling driven by a “bumper crop in Brazil and a Covid-19 resurgence weighing on demand”, the bank said, noting too a boost to sales in the South American country thanks to a weak currency, which boosts the value in local terms of assets traded internationally in dollars.


“The current weakness of the Brazilian real, which incentivises exports, is resulting in Brazilian crop flooding the international market.


“The currency is currently above 5.5 against the US dollar compared to 3.5 on average over the five years from 2015 to 2019.”


‘Not believing the numbers’

Among livestock, funds proved net sellers in lean hog futures and options too, after 12 successive weeks of net buying, a spree which had matched the longest on record.


The selling came in week which bought a US Department of Agriculture showing the US hog herd rising by 0.7% year on year as of September 1, faster growth than the 0.1% figure expected by investors.


However, after some initial pullback, the softness in Chicago lean hog futures has been limited, with Steiner Consulting saying that “there’s a lot of talk about not believing USDA numbers”.


The report included, for instance, a figure of 9.8% growth to 1.3m head in the supply of hogs in the 180-plus-pound category.

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