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Funds renew ag selling wave - leaving them open to 'precarious position' on soy

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The 2018 thawing in hedge funds’ attitude towards agricultural commodities was over my mid-January – although fresh selling may have left them in a “precarious position” on soybeans, and overexposed in short bets in coffee and wheat.


Managed money, a proxy for speculators, returned to a bearish shift in positioning the top 13 US-traded agricultural commodities in the week to last Tuesday, raising its net short by more than 115,000 contracts, analysis of data from the Commodity Futures Trading Commission regulator shows.


The significant increase in the net short position - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – more than reversed a more bullish positioning trend over the previous two weeks, which came amid ideas that 2018 would prove better for commodity prices.


Fund managers this month were at their most bullish in positioning on commodities for more than a year, according to a Bank of America Merrill Lynch survey released last week.


‘Bearish tone’


Funds’ ag selling in the latest week came as “a bearish tone swept across agri markets”, Rabobank said, noting the dent to prices of many ags delivered by a slew of US Department of Agriculture data on January 12.


The USDA, for instance, estimated US winter wheat sowings for this year’s harvest at a level well above market expectations, and raised its estimate for domestic corn stocks by more than investors had forecast, reflecting a yield upgrade to the latest harvest.


Meanwhile, sugar futures fell as Brazil proposed easing restrictions on imports of US ethanol – boding ill for prices of the biofuel, and thus for the sweetener as well, which competes with ethanol for a share of the South American country’s cane harvest.


The declines were reflected in the value of the Bcom ag subindex, which last Tuesday touched 46.5998, the lowest since it was launched 27 years ago.


‘In a precarious position’


However, the Bcom subindex has recovered somewhat since, by 1.5% as of Monday, helped by factors including dollar softness, which makes dollar-denominated exports such as many ags more affordable, but also some fundamental market factors.


Notably, these include increasing worries over dryness which have helped Chicago soybean futures for March rebound more than 4% from a January 12 low.


Yet the uptick in worries has come as hedge funds have been building up bearish bets on the oilseed, with their net short touching 103,397 lots as of last Tuesday – the third largest on data going back to 2006.


“Managed money sold more soybeans for the week than expected,” said Terry Reilly at Futures International.


Water Street Solutions said that the “gigantic net short position”, meant that “a weather issue coupled with the large short fund position could catch the market off-guard”, potentially prompting a surge in prices which would leave speculators well out of the money.


“A weather threat in South America could have the funds in a precarious position.”


‘May be no one left to sell’


Meanwhile, Marex Spectron cautioned against getting overly bearish on raw sugar, in which managed money hiked its net short in futures and options by more than 54,000 contracts in the latest week, the fourth largest swing bearish in positioning on record.


“Once the funds have stopped selling, there may be no one left to sell”, the London-based trading house said, noting the extent to which weak sugar prices, in encouraging Brazilian mills to turn cane into ethanol rather than sweetener, may undermine production.


“If the sugar mix does go down to say 41% [of the cane crop], then Centre South Brazilian sugar production would fall to something like 30m-31m tons,” Marex said.


“Can the market really stay at 13 cents a pound with the loss of 5m tonnes” of sugar?


While the sugar price “cannot go up because of the surplus” in world production this season, it “cannot really go down because no human wants to be short below 13 cents a pound”.


‘Possible inflection point’


Separately, Societe Generale said that its analysis of the CFTC data, which compares the extent of the net fund position to the number of funds involved, suggested that a “mismatch between the net number of money-managers and their net position” suggested a “possible inflection point” for prices.


Raw sugar futures for March in fact stood down 0.2% at 13.23 cents a pound in late morning deals in New York on Monday, returning closer to the three-month intraday low of 13.02 cents a pound set in the last session.


SocGen added that in both Chicago and Kansas City wheat, the extent of net short positions rendered the contracts “oversold” and “vulnerable to short-covering”.


A similar analysis was attached to New York-traded arabica coffee futures and options.


‘Bullish market factor’


However, the bank rated one ag contract – New York-traded cotton – as “overbought” and “vulnerable to profit taking”, after hedge funds raised their net long in the fibre to a record high of 108,778 lots in the week to last Tuesday.


“The ongoing speculator squeeze continues, while mills attempt to fix a portion of their on-call sales,” said Rabobank, which last week forecast elevated cotton values and volatility to extend for the rest of the first half of 2018.


“The on-call data continue to be a bullish market factor,” said Louis Rose at Rose Commodity Group.

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