The extent of hedge funds’ bearish sentiment on wheat prompted to take their net shorts in both hard and soft red winter contracts to record highs, while raising negative positions in corn too – prompting ideas of “huge potential” for an upward spike in prices.
Managed money, a proxy for speculators, trimmed its net short position in futures and options in the top 13 US-traded agricultural commodities overall by 4,168 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
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 – reflected largely a less downbeat stance on Chicago soybeans.
Speculators slashed their net short in soybean futures and options by more than 34,000 contracts from the previous week’s record high, encouraged by improved expectations for US corn sowings, which lowers prospects of farmers switching area to the oilseed, which can be later seeded.
Historically, record net short, or net long positions, have also tended to encourage a reversal, raising fears among hedge funds that appetite for further extending the trend may be waning.
Record net shorts
However, speculators have, of late, shown an increasing willingness to stick with elevated net short positions.
Indeed hedge funds’ overall net short in ags, at 138,444 contracts, remained historically large – second only to the record the week before.
Of the seven weeks since 2006 when speculators have held net short positions in ags overall, six of them have occurred in the spree which started in mid-March.
In the latest week, hedge funds showed a continued confidence in falling wheat prices – lifting net shorts in both Chicago-traded soft red winter wheat and Kansas City hard red winter wheat futures and options to record highs.
Wheat out of favour
Sentiment in US wheat prices has long been undermined by soft US export demand, dented by dollar strength, which has made the country’s shipments less competitive.
However, selling has gained more recent momentum from rains which have begun to reduce the extent of drought in the central and southern US Plains, hard red winter wheat country, even though evidence of crop improvement so far has been modest.
The net short that hedge funds held in Kansas City hard red winter wheat, at 11,418, was by far the largest on record, beating the 7,866 lots set in July 2013 – and thanks to the biggest selldown since 2012, of more than 10,000 contracts.
In Chicago soft red winter wheat, the world benchmark, speculators lifted their net short to a fresh record high of 96,624 lots.
‘Huge correction potential’
But the extent of the sell-off raised some ideas of a revival in prices ahead.
Terry Reilly at Chicago-based broker Futures International said: “Fast money traders sitting on a short position when the market appears to be trading range-bound, could start unwinding positions,” a dynamic which would support prices.
“Much of the bearish fundamentals are already worked into the market,” he added.
Commerzbank – noting also the raise in the net short in corn to the biggest in 15 months – said that “if sentiment were to shift, this would generate huge correction potential” for prices as closing of short positions sends futures soaring.
Hogs vs cattle
Hedge funds also turned markedly more downbeat on cotton prices, cutting their net long position by nearly 15,000 contracts, the biggest selldown in five months.
Sentiment in the fibre was undermined by a series of poor US weekly export sales data, culminating in a net cancellation of 21,816 bales, before a sharp improvement in the latest report, released on Thursday.http://www.agrimoney.com/news/hedge-fund-sales-create-huge-potential-for-wheat-price-rebound–8257.html
In the livestock complex, managed money turned a net seller in live cattle futures and options for the first time in seven weeks, as a slide in US cash prices sent futures sharply lower.
By contrast, in lean hogs, speculators continued to rebuild their net long position, encouraged by some buoyancy in pork prices.