Hedge funds staged a mass retreat from their net record net short in agricultural commodities, encouraged by weather worries in Argentina and the US – although raising ideas they had reversed too far.
Managed money, a proxy for speculators, slashed its net short position in futures and options in the top 13 US-traded agricultural commodities, from cocoa to cattle, by 215,874 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
That represented one of the largest swings positive in positioning – the fifth largest, in fact - on data going back to 2006, and took the net short below its week-before figure of 393,914 lots which was the most bearish reading on record.
And the shift drove ag prices, as measured by the S&P Agri Index, up 3.1% during the week.
“Weather risks across the Americas helped spark the buying interest as speculative short positions were reined in,” said Rabobank, highlighting that “funds bought heavily to trim net short positions across the agri complex”.
‘Surge of short covering’
In South America, buying was spurred by Argentine dryness which has prompted a rash of downgrades to estimates for corn and soybean production, although balanced somewhat to some upgrades to hopes for Brazil.
Informa on Friday slashed by 5m tonnes to 37m tonnes its forecast for Argentine corn output in 2017-18, while cutting its soybean harvest estimate by 3.5m tonnes to 51m tonnes.
Meanwhile, in the US, futures in Kansas City hard red winter wheat gained particular strength from US Department of Agriculture data showing a sharp deterioration in the condition of winter wheat crops in particular in the southern Plains, a major growing area for the type.
Indeed, Rabobank flagged a “surge of short covering, as the USDA reported particularly poor crop conditions in the southern Plains states, raising concerns over increasing winter crop abandonment”.
‘More than the trade expected’
However, the extent of the short-covering wave raised concerns it had been overdone and, in slashing scope for further such positional shifts, was seen as fuelling a weak start to the week for grain futures.
In wheat, in which hedge funds cut their net short by the most in seven months, buying was “more than many in the trade expected”, said Benson Quinn Commodities.
“Look for the report to offer resistance early” this week to upward movement in wheat prices, the US-based broker added, with futures in the grain indeed falling on Monday.
Terry Reilly at Futures International said that the CFTC report showed fund positions “less short than estimated in corn, soybeans and soymeal”, futures in which also started the week in decline.
‘Vulnerable to short-covering’
Societe Generale, highlighting that the net short covering in soybeans of nearly 60,000 lots week on week was one of the largest on record, also flagged caution on price expectations.
“While the weakness of the US dollar has perhaps raised the global cost floor for soybean, record inventories and another large crop in Brazil will continue to cap prices in the near term,” the bank said.
However, SocGen flagged too some more bullish assessments from the CFTC report among soft commodities, including New York-traded arabica coffee, in which managed money, while trimming its net short by nearly 4,000 lots week on week, left it at a historically high 50,231 contracts.
The contract remained “oversold” and “vulnerable to short-covering”.
‘Funds are too short’
It was an assessment the bank applied too to New York-traded raw sugar, which bucked the bullish shift in positioning, suffering a hefty selldown to a net short of 150,863 – the largest on record.
The selling came ahead of the Dubai sugar conference, which started at the weekend, which many investors expected to unveil upbeat expectations for world supplies of the sweetener.
In fact, Marex Spectron reported that talk at the first day of the conference “gave us the impression that people were thinking the funds are too short” in sugar, and that the “market cannot be that bearish if we are going to lose 4m, 5m, 6m tonnes of Brazilian production”, as forecast for 2018-19.
“But by the second day we were not so sure. A lot of people were impressed by a clear presentation which showed that most producers could not reduce supply until 2019-20 and the few who could, would not.”
Raw sugar futures for march stood little changed in early deals in New York.
‘Big supplies, mixed demand’
Other highlights of the data included an unusually large selldown in cotton - of 11,786 contracts week on week, the most in seven months, and dragging the hedge fund net long further below its record high of 108,778 contracts hit earlier last month.
Rabobank flagged a dent to sentiment from a “disappointing bout of US upland export sales - the second lowest this marketing year, at 68,684 bales - raising concerns that 80+ cents-a-pound prices were stifling demand”.
In the livestock complex, hedge funds cut their net long in Chicago lean hog futures and options by 7,265 lots to 52,503 contracts – the lowest in eight months.
“Big supplies and mixed demand have weighed on the hog market,” said Water Street Solutions.
“Carcass weights have recovered, adding supply. Packer margins have been under pressure, estimated at $11.70 per head.”
Official data on January 25 on US hog slaughter in December came in at 10.461m head.
While at a headline level showing a drop of 0.1% year on year, “when adjusted for the number of slaughter days, daily slaughter last month was 4.9% higher than the previous year”, analysts at Steiner Consulting said.