Hedge fund optimism in agricultural commodity prices, as measured by positioning in derivatives, plunged at its fastest rate in 20 months, led by a surge in pessimism over values of wheat and sugar, in which bearish bets hit a record high.
Managed money, a proxy for speculators, slashed by nearly 130,000 contracts its net long position in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.
The reduction in the net long position – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – was the largest since July 2013, when bigger-than-expected data on US corn plantings sent grain markets tumbling.
And it took the combined net long to 133,665 contracts, the lowest since August 2013.
The retreat in the net long came amid a further surge in the dollar, which set a further series of 11-year highs during the week against a basket of currencies, lifted by expectations that US economic improvement will foster relatively imminently a rise in interest rates.
A strong dollar reduces the competitiveness of dollar-denominated exports, such as the major US-traded ag commodities.
Conversely, weakness in the Brazilian real, which last week touched R$3.00 to $1 for the first time since 2004, reduces the value, in dollar terms, of ag commodities in which the South American country is a big player.
Futures in arabica coffee, of which Brazil is the top producer, hit a one-year low of 126.25 cents a pound last Tuesday, undermined by weakness in the real, as well as rains which have eased concerns over drought damage to the country’s coffee, and sugar cane, belts.
Record sugar sell-off
The drop in prices to Tuesday was fuelled by hedge funds’ biggest bearish turn in 21 months in positioning on New York-traded arabica coffee futures and options, by a net 9,744 lots over the week.
That turned speculators net short in arabica coffee for the first time since January last year.
But it was New York-traded raw sugar futures and options which suffered the brunt of hedge fund bearishness over the weak real and weather improvements – with a hike in the net short by 62,344 lots to 99,439 contracts.
That was the biggest swing net short in positioning on records going back to 2006, and by far the biggest net short position in that period too.
Ironically, however, extreme net short, or net long, positions can herald a rash of covering of such positions, amid concerns that appetite for such holdings has been spent.
Sucden Financial said while it was “anybody’s guess” when the latest selling wave in sugar will end, “at some stage it will run out of steam as it did once the speculators covered their [short] positions last month taking March raw sugar futures over 15 cents a pound”.
May raw sugar futures, now the spot contract, hit 13.18 cents a pound last week, the lowest for a near-term contract since 2010.
Among grains, hedge funds cut their net long in Chicago corn futures and options by nearly 30,000 contracts to a one-year low of 50,193 lots.
In Chicago soft red winter wheat, they raised their net short position by more than 24,000 contracts to 56,415 lots, the highest since October, amid particular concern over the sluggish pace of US wheat exports in the face of the strong dollar.
The rise in the net short reflected a cut in the gross long position to a three-year low of 57,538 lots.
In Kansas City-traded hard red winter wheat, speculators cut their net long position to a 19-month low of 1,568 contracts.
‘Lower prices are required’
Other notable bearish turns in positioning included a cut of 8,368 lots in the net long in Chicago lean hog futures – the biggest selldown in 15 months – to a 22-month low of 23,058 contracts.
Paragon Economics and Steiner Consulting have flagged “continued weakness in cash hog markets, large slaughter volume and a steady erosion in the pork cut-out” as behind weakened sentiment on prices, which last month hit their lowest since 2009.
“For the moment, there appears to be a lot more pork in the [US] market than previously expected, and lower prices are required to absorb this additional supply.
“For now, the US domestic pork market is oversupplied and it will take some time for retail markets to adjust and the seasonal improvement in demand to kick in.”
(Source – http://m.agrimoney.com/news/hedge-funds-cut-bullish-ag-bets-at-fastest-pace-in-20-months–8047.html)