Hedge funds’ bullish switch on agricultural commodities slowed as they ran out of short bets to cover, turning instead to banking some gains on rallies in the likes of sugar and wheat.
Managed money, a proxy for speculators, extended to an eighth successive week its net bullish turn in positioning on the top 13 US-traded commodities, from cotton to cattle, analysis of data from Commodity Futures Trading Commission regulator shows.
That is now the longest run of net buying since 2014, and took their net long - the extent to which long positions, which benefit when values rise, exceed short bets, which profit when prices fall – to a three-year high of 749,333 contracts.
However, the trend - viewed as spurred by fund purchasing of ags as a hedge against inflation which many investors believe could be poised for a rise - slowed dramatically, with the increase in the net long, at 22,652 contracts, less than one-10th of that seen the previous week.
The slowdown came as the short-closing bonanza which has fuelled the trend looked to be running out of ammunition. The total number of short bets left to close as of last Tuesday, at just over 460,000 lots, was the lowest since June 2016.
‘Changed from bull to bear’
Indeed, in some contracts, speculators returned to short-side betting, proving net sellers of Chicago wheat for the first time in four weeks, amid worries that US prices had reached levels sufficient to deter demand from importers.
In New York raw sugar futures and options, managed money proved a net seller for the first time in eight weeks, encouraged by weakness in oil prices, which cuts the competition from the biofuels sector for cane, besides by Brazil’s continued strong production of the sweetener.
“The sugar trend has clearly changed from bull to bear, with the flat price down 150 points (11.3%) from high to low in the past three weeks,” said Robin Shaw at Marex Spectron, if himself seeing reason for sugar prices to rise ahead, given talk that India may cut back on its export subsidy.
“If India lowers the subsidy, that would put Indian sugar out of reach at current world prices. Hence the general bullishness that world prices have to rise,” he said.
‘Bullish supply factors’
Hedge funds also returned to being net sellers in New York cotton, for the first time since July, even as producer and trade hedging of the fibre through futures and options slowed too, albeit at a level which represents the largest since December 2018.
However, in arabica coffee, hedge funds maintained for an eighth successive week their building of a net long position, encouraged by the shrinking in exchange stocks to a 20-year low, and with weather in key Brazilian growing areas drier, raising concerns that blossoms will abort rather than set to form cherries.
In New York cocoa too, managed money expanded its net long position, for a seventh week running, amid concerns, acordrding to some investors, over dryness in the key West Africa production region.
“The market continues to find support from bullish near-term supply factors,” said ADM Investor Services, although adding that it believed cocoa futures “will have trouble regaining upside momentum until there is a definitive rebound in global demand prospects”.
However, Societe Generale said that the cocoa buying may be down to political factors, and the forthcoming presidential election in Ivory Coast, where incumbent Alassane Ouattara has decided to run for a third term, even though the constitutional limit is two.
"This triggered violence, and in the week to September 8, more complications arose as ex-president Laurent Gbagbo declared his candidacy."
’Investors can continue buying’
In Chicago, managed money – spurred by weakening US yield forecasts and talk of large Chinese import needs - extended its net long in corn futures and options to 33,494 lots,
Nonetheless, “the investor long position is a long way off historical peaks,” which are above 400,000 contracts, said Tobin Gorey at Commonwealth Bank of Australia.
“Investors thus can continue buying” without raising concerns of an overcrowded position.
‘Price momentum strongly positive’
In soybeans, hedge funds raised their net long to a fresh two-year high of 173,907 contracts, also fuelled by US crop concerns, and strong Chinese demand.
In fact, according to JP Morgan, non-commercial investors’ net long position in soybeans is “seasonally long”, given the approach of harvest often weighs on values.
It is “likely tracking towards 2012 levels, when US inventories had collapsed below 150m bushels”, JP Morgan analyst Tracey Allen said.
While this is “very different” to 2020-21, which US soybean stocks are expected to end at 460m bushels, “soybean price momentum is strongly positive”, and values have room for further headway.
She added that “Brazilian farmers are very well sold for this season and next, which is capping out some of the typical producer selling”.
The gross commercial short in Chicago soybeans, at 592,089 contracts, hit its largest since April 2018.