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Hedge funds accelerate ag selldown - ahead of soyoil rally


Hedge funds hiked their bearish betting in ags by the most in five months, amid a turn worse in US-China relations, although such selling proved ill-fated in soyoil – and there are cautions over shorts in cotton too.


Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities, from cocoa to cattle, by 134,915 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.


The increase to the net short – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall - was the largest since March, and took the position to a two-month high of 227,655 contracts.


While reflecting net selling in all three ag complexes, the selldown was led by grains, in which hedge funds returned to a net short position for the first time in two months.


China-US woes

The selling came amid a week marked by threats by US President Donald Trump of 10% tariffs on a further $300bn of imports from China, denting hopes that the latest round of trade talks between the two countries would lead to a resolution- and the reopening to US ags of the huge Chinese market.


In soybeans, usually a huge US export to China, funds sold more than 19,000 contracts in Chicago futures and options, the most since April.


But while proving fruitful during the week in focus, during which grain prices fell, the latest short positions have not proved so lucrative since, with futures staging some recovery last week - attributed largely to short-covering ahead of a much-anticipated US Department of Agriculture Wasde briefing later on Monday.


The Wasde will include a revised estimate for US corn sowings, with many investors believing the USDA’s current estimate of 91.7m acres is significantly too large, given the historically wet spring.


Soyoil surge

In soyoil, latest short bets have proved particularly ill-fated, given the surge in Chicago futures in the vegetable oil late last week to three-month highs.


Hedge funds raised their net short in Chicago soyoil futures and options by 12,672 lots, to 37,075 contracts in the week to last Tuesday.


However, prices in the vegetable oil soared 7.2% over the last three sessions of last week, on ideas of improved demand by China, which has announced a review of quotas on palm oil, rapeseed oil and soyoil, in the face of declining domestic production.


One knock-on effect of China’s African swine fever epidemic has been, in prompting a large cut in the pig herd, a reduced demand for oilseed meals used in livestock feed, and so a lower oilseeds crush.


‘Short way too much’

Funds were “short way too much bean oil, the way it looks, which may explain the last three-day meteoric rise in that space”, said Benson Quinn Commodities.


“Funds [were] short a bit too much, and the door a bit small at the end of the hall” to enable an easy exit.


The soyoil price surge took prices back above their 200-day moving average, for the first time since March, implying that most short bets taken out in the last six months or more are under water.


‘Equally explosive’

Some commentators cautioned that cotton could be the next ag to see a similar short-covering fuelled price rebound – with the fibre, of which the US is the top exporter and China a major importer, likely to see strong buying if the two countries do reach an accord.


With managed money raised its net short in the week to last Tuesday to a fresh record of 47,428 lots, “notable potential for a speculator short-covering rally exists,” said Louis Rose at Rose Commodity Group.


At Commonwealth Bank of Australia, Tobin Gorey said that the extent of the shorting in cotton may reflect selling by both momentum and fundamental investors, segments which “we suspect only infrequently [build] positions at the same time”.


However, while these short bets have proved lucrative, with New York cotton futures hitting a three-year low last week, “a position of this size can be equally explosive when it is reversed too,” Mr Gorey said.


“The danger is that the catalyst for the exit is quite modest - prices merely have to roughly stabilise for a short period.”


The issue is also complicated by the weak amount of forward selling by producers currently evident in New York, allowing the commercial position to hit a net long, albeit of only 919 lots, last Tuesday for the first time on data going back to 2006.


Cocoa selldown

Other notable moves included a record net selldown in New York cocoa futures and options, of 19,414 lots, amid improving ideas of West African output.


“The weather in West Africa is called good for crop development as there have been periods of showers and rains,” said Jack Scoville at Price Futures.


“Ideas are that the next crop will feature good production.”

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