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Hedge funds return to net short in ags, as sugar leads sell-off in softs


Hedge funds returned to a net short position in agricultural commodities led by one of the biggest ever selldowns in softs, with sugar proving particularly out of favour.


Managed money, a proxy for speculators, sold nearly 130,000 lots more than it bought in the in futures and options in the top 13 US-traded agricultural commodities, from corn to cocoa, in the week to last Tuesday, data from the Commodity Futures Trading Commission regulator shows.


That selling took hedge funds to a net short (when short holdings, which profit when values fall, exceed long bets, which benefit when prices gain) of 60,812 lots.


And it reflected in particular selling in New York-traded soft commodities, in which managed money hiked its net short by 75,221 contracts – the biggest such move in 19 months.


Record net short

The selling saw hedge funds chalk up another record net short in New York cotton futures and options, of 45,230 lots, although this represented only a 960-contract increase on the previous record, set the week before.


Selling has been encouraged by decent US cotton production prospects this year, with the crop rated by the US Department of Agriculture as in the best condition in nine years.


The USDA has forecast US production up 3.6m bales year on year at 22.0m bales.


In fact, “this US crop is still likely to be north of 22m bales provided we get a clear harvest window,” said Ron Lee at McCleskey Cotton.


‘Very, very undersold’

Historically-large net long position can provoke ideas of an “overcrowded” position, rendering the market vulnerable to a price spike should short-covering become warranted.


Tobin Gorey at Commonwealth Bank of Australia said that “record [short] levels is no barrier to investors selling even more of course, but at that level the market will look for signs now that this source of selling is exhausted”.


But one potential hurdle to price gains is the extent to which producers have been deterred from selling at weak prices, with the CFTC data also showing the commercial gross short position at 62,297 lots – the lowest in a decade.


“Growers here in the US are very, very undersold which puts a great deal of selling above the market,” McCleskey’s Ron Lee said.


‘Massive short’

However, the biggest fund selldown amongst ags was seen in New York raw sugar futures and options, in which managed money hiked its net short by 75,449 lots, the second largest such move on data going back to 2006.


The selling came in a week in which a hefty 15,000 contracts of Thai sugar were delivered against the expiring London August white sugar futures lot, while ideas of sizeable Indian exports were stoked by a call from the Indian Sugar Mills Association for subsidy on 8m tonnes of the sweetener.


In fact, prices have recovered somewhat since last Tuesday, helped by data showing a sharp fall in Brazilian Centre South production in the first half of this month, although Marex Spectron downplayed the potential for funds rethinking their downbeat strategy on prices.


While terming the fund short “massive”, Marex added that “that does not say that the funds will turn any time soon – in fact there seem to be signs of new big funds entering the market from the short side”.


The hedge fund net short in raw sugar futures and options f 143,298 lots as of last Tuesday remained more than 30,000 contract shy of the record.


Cattle recovery

In grains, including the soy complex, hedge funds cut their net long by 55,397 contracts week on week, the biggest selldown in three months, with a range of contracts suffering, as concerns grew of rising US ag prices curtailing demand.


However, Chicago livestock saw a small rebuild in the net long, as funds for a second week proved net buyers in live cattle futures and options – after an 11-week selling streak, the longest such run on data going back to 2006.


Live cattle futures have recovered this month from one-year lows, helped by ideas of rising US consumer demand, which were supported last by data showing a drawdown in the amount of beef in cold stores.

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