Hedge funds expanded again bearish bets on agricultural commodities, fuelled by – another - record selldown in cocoa, although with soyoil bucking the trend, attracting its biggest-ever buying spree.
Managed money, a proxy for speculators, extended its net short position in futures and options in the top 13 US-traded agricultural commodities, from hogs to coffee, by 44,043 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
That represented a fifth successive increase in the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – taking it to the largest since May.
However, while ag market news in the week in question was dominated by the limit-down close to Chicago corn futures, following an unexpected upgrade to the official US harvest forecast, it was actually soft commodities which attracted the most selling of the three ag complexes.
Speculators expanded their net short in New York-traded soft commodities by more than 39,000 lots to 241,883 contracts, taking the figure to within 30,000 contracts of the record high.
‘May be taken as bearish’
Some of this New York selling came in raw sugar, in which speculators raised their net short by nearly 13,000 lots, although fund sales were actually viewed as “slightly less than expected” by Marex Spectron, with many have seen a jump in open interest as signalling expanded fund shorts.
As it was, “the commercial sector was largely responsible for the increase in open interest,” ie the number of live contracts, with both the gross commercial long and short up by more than 30,000 lots.
“On a falling market, it has been apparent that end-users have stepped up price cover at the same time as producers have increased their own pricing,” Sucden senior trader Nick Penney said.
Producer selling may have been mills “in Centre South Brazil taking advantage of a weaker real, which broke through 4.00 against the dollar”, so raising the value in domestic terms of assets priced internationally in dollar.
Mr Penney added that “the fact that the speculative part of the market has not substantially increased its short may be taken as being bearish as it means they still have ammunition left” for fresh sell positions.
‘Needs stronger outside markets’
It was New York cocoa futures and options which attracted more notable fund selling, with managed money a net seller of more than 23,000 lots – the most of any week on data going back to 2006 – to return to a net short in the bean.
The selldown fuelled a 16.2% price decline, on a nearest-but-one contract basis, which has driven New York cocoa futures from a one-year high, set in mid-July, to a four-month low as reached on Friday.
The drop has been attributed to improved forecasts for West African output, at a time when enhanced worries over global economy have curtailed hopes for cocoa demand.
"Favourable weather in West Africa and stronger-than-expected production have pressured prices," said Societe Generale, noting that "cocoa arrivals in Ivory Coast ports [from producers] amounted to 2,138m tonnes from October 1 to August 4, up 7.8% on the same period last season".
ADM Investor Services said: “While the market still remains on-course for a global [production] deficit next season, cocoa needs to see stronger outside markets to improve its near-term demand outlook."
Citigroup has cut by $200 a tonne to $2,450 a tonne its 2020 cocoa price forecast, citing lowered expectations for the world production shortfall, viewing US-China trade tensions and weaker emerging market currencies are potential demand headwinds.
‘Do funds want to go short?’
Among ags, only Chicago corn attracted greater net selling than cocoa, at nearly 35,000 lots, although this fell short of expectations of some investors, given the limit-down price reaction to the US Department of Agriculture’s surprise upgrade last Monday to its forecast for this year’s domestic output.
Indeed, there was some idea of the report indicating further scope for fund selling, given that they retain a modest net long position despite improved US harvest hopes.
“This afternoon’s report showed funds are near even in corn,” said Benson Quinn Commodities.
“Question now is, do funds want to go short in corn?”
Commerzbank said that “in view of the dramatic price slump – corn had shed a good 11% of its value within two days after the USDA report – the reaction from [funds] appears pretty moderate”.
Commerzbank also noting that in Chicago wheat, in which funds trimmed their net long by 2,131 contracts to a two-month low of 4,088 lots, “fewer and fewer market participants believe that the wheat price will recover”.
However, by contrast, the CFTC data showed huge buying in Chicago soyoil futures and options, of a record 47,404 lots, driving the fund position net long for the first time in five months, and spurring price gains.
The purchasing came as China proposed ditching import quotas on soyoil, rapeseed oil and palm oil in the face of weakened domestic vegetable oil output – in turn a knock-on effect from the African swine fever epidemic in reducing demand for oilseed meals for feed.
The fund shift - driven by a near-50,000 contract short-covering drive - likely came at a large cost to funds, as prices shot above average levels for the past six months, putting many short bets under water.
The CFTC data also showed oilseed processors selling heavily into the soyoil rally, with the gross commercial short up a record 48,896 lots week on week.