Hedge funds hiked their net long bets in agricultural commodity futures to the highest in a year, fuelled by a surge in buying in grains and, in particular, corn, which far offset selling in the livestock complex.
Managed money, a proxy for speculators, hiked its net long position in futures and options in the top 13 US-traded agricultural commodities, from coffee to corn, by 221,876 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The buying surge lifted the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 510,635 lots, the highest in a year, and representing an astonishing about-turn in hedge fund sentiment this year.
Six weeks before, the speculative net long hit a record of 393,914 lots.
‘Came as a shock’
The recovery in sentiment has been evident somewhat in the New York-traded soft commodities complex, in which managed money halved its net short position to some 47,000 lots in the latest week, driven by short-covering in raw sugar futures and options.
Funds in the latest week proved net buyers of cocoa for a seventh successive week, a streak not exceeded since 2013, amid worries over West African cocoa supplies, raising their net long to an 18-month high of 31,943 contracts.
“Arrivals in Ivorian ports disappointed while technical trading ensued,” Rabobank said.
However, more significant was buying in raw sugar, in which speculators slashed net short betting by nearly 30,000 lots in the week to Tuesday - although they may wish they had not, with New York futures on Wednesday tumbling to an eight-month low, weighed by data showing record Indian production.
While to market funds the India data “did not come as a surprise… to funds, especially system funds, who only react to headlines, it came as a shock. So they sold,” said Marex Spectron.
“We should not underestimate the effect of headlines.”
But bigger buying came in grains (including the soy complex) in which hedge funds hiked their net long position by 188,118 contracts to 441,927 lots, a 20-month high.
The buying reflected in part a further increase - to a record high of 115,500 contracts - in the net long in soymeal futures and options, prices of which have been spurred by drought in Argentina, the top exporter of the feed ingredient.
However, the largest buying came in corn, in which funds undertook a “staggering” amount of buying, according to Terry Reilly at Futures International,
“There was a lot of corn buying that went under the radar.”
The managed money net long in Chicago corn futures and options soared 104,414 lots to a 20-month high of 163,534 lots.
The rise in the gross long, at 64,524 contracts, was the most on data going back to 2006.
Ominous for prices, or not?
With some further buying later last week, after the US Department of Agriculture in its Wasde briefing forecast a surprise decline in US corn stocks this season, “investor’s long position might by now be approaching a new record”, said Tobin Gorey at Commonwealth Bank of Australia.
Further buying could, Mr Gorey said, still await, with “the record… just a number, not a barrier to investors buying still more futures”.
But some other commentators, including Societe Generale, cautioned that the extent of purchases could leave corn prices vulnerable to downward pressure.
The extent of the rise in long bets in corn, “combined with the strength in corn prices last week, has pushed corn into the overbought box”, SocGen said.
‘Vulnerable to profit-taking’
Corn, along with soybeans and soymeal, was “overbought” and “vulnerable to profit-taking”, the bank added.
Benson Quinn Commodities, meanwhile, said that there “may have been a little more buying than expected in the wheats” than expected, with funds raising their net long in Kansas City hard red winter wheat to a six-month high of 20,759 lots, while slashing their net short in Chicago soft red winter wheat to 32.531 lots.
Spurred by worries over drought in parts of US winter wheat country, “investors are buying back a short position,” CBA’s Tobin Gorey said.
“Friday’s positions report suggests that investors have largely completed that task.”
In the livestock complex, hedge funds cuts their net long position by 14,185 to a 15-month low of 115,729 contracts, reflecting selling in both cattle and hogs, despite the prospect of the barbecue season beginning to appear on the horizon .
“Big supplies should keep a lid on [cattle price] rallies despite seasonal tendencies for strength into the warmer weather,” said Water Street Solutions.
In the pork complex, “seasonally we should be seeing cash pork prices stabilise as the grilling season nears, but huge supplies will likely moderate the strength potential over the next several weeks,” the ag advisory group said.
‘Lower prices are necessary’
Analysts at Steiner Consulting said that “higher hog and pork supplies and underwhelming retail feature activity appear to have caught up with the pork market and wholesale values have come under significant pressure.
“Two weeks ago the pork cutout value was quoted at around $80 per hundredweight and spring hog prices appeared to be on a solid footing.
“On Friday, afternoon USDA quoted the pork cutout value at $73.43 per hundredweight, a 9% decline from two weeks ago and now 10% lower than the same period a year ago.”
With US pork production is running at 5% higher, year on year, for the last three weeks, “lower prices are necessary to push all this product through domestic and export channels”.