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Hedge funds lift livestock longs to record high - but coffee 'vulnerable to short-covering'

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Hedge funds curtailed their negative position on agricultural commodity prices, as bets on rising livestock values more than outweighed selling in grains - and coffee, now deemed “significantly vulnerable to short covering”


Managed money, a proxy for speculators, reduced its net short position in futures and options in the top 13 US-traded agricultural commodities, from cattle to wheat, by 22,049 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.


However, the reduction in the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain - was down nearly all to the clamour to cash in on a rally in Chicago-traded livestock prices, which have outperformed those of other ags.


The Bcom livestock subindex is up 7.3% so far this year, compared with a fall of 10.7% in the ag index.


‘Prices are dramatically higher’


Hedge funds raised their net long position in the livestock complex by nearly 23,000 lots over the week to 228,340 lots, the highest on data going back to 2006, and reflecting increases in all three contracts.


Managed money position in livestock futures and options, November 7
Contract Net position Change on week
Live cattle 132,032 +11,576
Lean hogs 78,206 +10,314
Feeder cattle 18,102 +1,097
Sources: Commodity Futures Trading Commission, Agrimoney


“Year-over-year, livestock futures market prices are dramatically higher,” said analysts at Steiner Consulting.


“Last year at this time, futures markets, especially for cattle, were signalling to meat buyers for retail stores and restaurants, that prices would remain rather low and there appeared to be opportunities to buy out-front for features and special promotions.”


Price gains have been attributed to stronger-than-expected demand, including from exports, mopping up extra production, with hog markets boosted in particular by the opening of two new US slaughter plants.


‘Competition for animals’


Indeed, Steiner said that “a significant contributor to higher hog prices has been competition for animals”, a dynamic reflected in weakened packing margins, with the spread between wholesale pork prices and values of fattened animals falling below $45 per head to its lowest in more than a year.


However, Societe Generale underlined concerns over the extent of long bets in the complex, now terming both live cattle and feeder cattle as “overbought” and “vulnerable to profit-taking”.


And, indeed, futures in live cattle – animals ready to be slaughtered – retreated strongly last week, by 5.3% to 120.575 cents a pound for the December contract, in a decline attributed to the raised supply of animals for slaughter after an expansion of the feedlot herd.


“Lower cash trade hit the futures market hard” last week, said ag advisory group Water Street Solutions, although adding that “retail prices are holding up, leaving the trade watching if demand into the end of the year stays strong”.


‘Positions are untenable’


By contrast, Societe Generale hardened its caution that prices of New York-traded arabica coffee may be in for a spike in prices prompted by short-closing, after hedge funds raised their net short in the contract to a record high of 48,905 lots.


“Comfortable inventory levels and improving weather in the Latin America region have capped any price upside in recent weeks,” the bank said.


“But current positions are untenable over extended periods of time,” it said, adding that it viewed “this commodity as significantly vulnerable to short-covering”.


Unlike hedge funds, commercial operators held a gross short of just 84,731 lots, half that a year before, in what is being seen as a reluctance by producers to sell at weak price levels.


‘Only thing supportive’


Among the main grains, hedge funds extended their net short in Chicago corn futures and options by a further 2,861 lots to 205,624 lots, the third highest figure on data going back to 2006, and provoking some ideas that appetite for betting on weaker prices of the grain may be spent.


Indeed, the “only thing supportive [for corn prices] appears the managed money position”, said Benson Quinn Commodities, with a further upgrade to the official US yield forecast last week adding to ideas of ample supplies.


In wheat, hedge funds extended their net short in Chicago by more than 14,000 contracts to 125,085 lots, the largest since the record high of 162,327 lots set six months ago.


Benson Quinn Commodities rated the extent of the net short position in Chicago as leaning “supportive” to prices short-term, “from the standpoint of the sellers not wanting to push the issue” and extend the holding further.


However, “longer term, I have doubts that the funds are going to need to cover a large percentage of their current position”.

Managed money position in livestock futures and options, November 7

Contract Net Position Change in Net Position
Live Cattle 132,032 contracts (+11576 contracts)
Lean Hogs 78,206 contracts (+10314 contracts)
Feeder Cattle 18,102 contracts (+1097 contracts)
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