Hedge funds hiked bullish bets on agricultural commodities to a near-seven-month high, fuelled by worries over Argentine, European and US weather, although the extent of the long positions raised some alarms of selling pressure ahead.
Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, from wheat to hogs, by 136,608 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The increase in the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – reflected overwhelmingly sentiment on grains, in which the net long soared by 131,968 contracts, the highest since July.
However, the extent of the buying by funds, which in late January had a net short of more than 450,000 contracts in grains, raised some alarm bells among investors of profit-taking on prices which had, thanks to weather worries, enjoyed a strong February.
Soy and corn prices were boosted by dryness and Argentina, and wheat futures by a lack of rain in the US southern Plains, a major winter wheat-growing area, besides, to a lesser extent, cold weather in Europe.
Terry Reilly at Futures International said that the data showed “traditional funds more long than estimated by the trade for all the major commodities”, a factor which can often provoke selling, in meaning speculators have used more buying ammunition than had been thought.
Concerns were particularly acute over soybeans, in which hedge funds raised their net long in Chicago futures and options to a one-year high, and soymeal, in which bullish betting hit the highest on data going back to 2006.
Societe Generale said that its analysis of the data, and the fact that “both markets are now within the top quartile of the recent one-year range”, had pushed “both commodities into the overbought box”.
Soymeal the bank termed “extreme overbought” and “extremely vulnerable to profit-taking”.
In corn, speculators built their largest net long in six months.
However, for wheat the CFTC data showed less marked buying, of 6,407 lots for Chicago soft red winter wheat. In Kansas City hard red winter wheat, hedge funds cut their net long for a third successive week.
“The wheat price had gained by around 10% last week in response to poor US crop ratings, which might have suggested a more pronounced cut in short positions” in Chicago wheat, Commerzbank said.
“That said, the data reflect the changes only up to last Tuesday, while the marked price rise did not begin until the second half of the week,” the bank added.
‘Recommendation to stay long’
Indeed, JP Morgan, assessing that “grains and oilseed prices crept into overbought territory” late last week, closed a bet it had recommended a closure of a bet it had recommended on wheat options, with a 5% profit.
It cautioned over the threat to prices from farmer sales, saying that “additional producer selling is the primary factor that could prompt a decline in price momentum from current levels”.
In both corn and soybeans, the gross commercial short in futures and options hit the highest since summer 2016 as producers hiked forward selling of crops.
Still, JP Morgan said it was keeping a “recommendation to stay long the agri commodity complex”, and in wheat remained “constructive” on price prospects.
‘Barrier to prices falling’
Among New York-traded soft commodities, SocGen signalled the potential for price support to raw sugar, after CFTC data showed the managed money net short rising to 136,255 lots, the second largest on data going back to 2006.
The contract was “oversold” and was “vulnerable to short covering”, the bank said, with Tobin Gorey at Commonwealth Bank of Australia saying that the position at least offered a floor against falling prices.
With a strong recovery in prices last week from multi-month lows also indicating “a ready buyer as prices fall”, the “huge” net short position “is a barrier to prices falling much in the near term”.
SocGen was cautious on the extent of buying in cocoa prices, which on Monday hit $2,355 a tonne for May delivery, a 15-month high for a nearest-but-one contract, rating it as “extreme overbought and “extremely vulnerable to profit taking”.
Funds raised their net long in cocoa futures and options to a 17-month high of 26,134 contracts.