Hedge funds lifted bullish betting on agricultural commodities to the highest in four years, attracted by the sector as an inflation hedge, as well as by tightening supply expectations for many contracts.
Managed money, a proxy for speculators, raised its net long position in futures and options in the top 13 US-traded ag contracts, from arabica coffee to wheat, by 60,294 contracts in the week to last Tuesday, analysis data from the Commodity Futures Trading Commission shows,
That represented a ninth successive increase in the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – matching the longest unbroken spree of expansion on data going back to 2006.
The buying took the net long to 809,627 contracts, the largest since June 2016.
The sector’s appeal has been widely attributed both to growing inflation concerns - underlined last week when the Federal Reserve pledged to keep US interest rates near zero until inflation is on track to "moderately exceed" its 2% inflation target "for some time” – and to supply and demand fundamentals.
Corn, soybean buying
Indeed, during the week to last Tuesday, the US Department of Agriculture cut its forecasts for domestic corn and, in particular, soybean inventories at the close of 2020-21, citing weakened yield expectations after a dry and stormy summer in the Corn Belt.
And many investors expect further stocks downgrades, given bumper starts to the season for US exports of both crops.
Indeed, for corn, investors raised their net long by more than 25,000 contracts in the latest week to a 13-month high of 58,556 contracts, reflecting a sixth successive week of net purchasing.
For soybeans, the managed money net long rose above 190,000 contracts for the first time in more than two years – a figure widely expected to have been exceeded since.
‘Topped up their long positions’
The data “suggest that short-term-oriented market participants have been lending support to the steep rise in soybean prices over the last month due to their changed view of the market”, Commerzbank said
“Anticipating rising prices, many actors had topped up their long positions again in the last reporting week,” the bank said, flagging the evidence from prices of further buying since last Tuesday.
“The price gained by another good 5% between Wednesday and Friday,” with November futures ending last week at $10.43 ½ a bushel, the highest close for a spot contract since April 2018, before the China-US trade war which sent prices tumbling.
“For the time of year, that is to say just as US harvesting gets underway,” a period which often associated with seasonal weakness on values as supplies receive a boost, “the price was last at a similarly high level in 2013”.
Caught out on coffee
For many soft commodities, hedge funds raised bullish betting too, including in New York arabica coffee, in which they increased their net long in futures and options to 51,831 contracts, the highest since November 2016.
The buying has reflected a drain on exchange stocks which has driven them to their lowest level in 20 years – although with talk of Brazilian warehouses filling with physical supplies, and rains which bode well for crop development for the 2021 harvest, prices have fallen back markedly.
The December arabica contract stood at 112.20 cents a pound on Monday, down 7.9% from their close last Tuesday, and putting under water all long positions put in over the past two months.
‘Sky is the limit’
By contrast, for raw sugar, futures have defied a turn by hedge funds to selling down their net long position, which as of the start of the month had hit a near-four-year high of more than 190,000 contracts.
New York’s October contract stood on Monday at 12.81 cents a pound, up 6.0% from last Tuesday, helped by a recovery in oil prices, as well as some concerns over the comfort of world supplies
At Marex Spectron, Robin Shaw said that “if everything goes well, and no weather damage occurs, we are going to be in a comfortable surplus and in that case the price should gravitate around the ethanol parity,” which he pegged at about 10.50-11.00 cents per pound.
“But if anything goes wrong and we lose 2m-3m tonnes of supply then we may be needing more sugar than Centre South Brazil can supply if they go to ‘maximum sugar’.
“In that case the sky is the limit” for prices, because “sugar production and consumption are extraordinarily inelastic”.