Hedge funds turned less downbeat in bets on agricultural commodities for the first time since before Christmas – but wheat largely missed out on the move, raising ideas of the potential for some price support.
Managed money, a proxy for speculators, cut its net short position in futures and options in the top 13 US-traded agricultural commodities, from soybeans to cocoa, by 87,632 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The drop in the net short – the extent to which short holdings, which profit when values fall, exceed long position, which benefit when prices gain – ended a four-week spree of hedge funds building their bets on weaker prices, amid indeed a profitable period for commodity bears.
The CRB commodities index is already down some 7% so far in 2016, and last week touched its lowest since March 2002.
The reduction in the net long was led by a less bearish attitude towards grains and the soy complex, in which hedge funds cut their net short by more than 64,000 contracts to a one-month low of 275,751 lots.
In Chicago soybeans, managed money halved its net short, taking it below 26,000 lots, amid reviving concerns over the Brazilian which, first tested by dryness in the key central growing region, is now suffering excessive rains, which are slowing harvest and cutting yields in some areas.
Influential analyst Michael Cordonnier has flagged talk that some farmers in north eastern Mato Grosso, the top Brazilian soy producing state, who had expected yields of about 52 bushels per acre, were now seeing results of about 46 bushels per acre.
And quality is an issue too, Dr Cordonnier said, noting that “any time that mature soybeans are exposed to prolonged periods of wet weather, the quality of the crop can deteriorate quickly, especially if the temperatures are hot like they are in Mato Grosso”.
The slow harvest has also meant a delayed start to Brazil’s export season, leaving importers reliant for supplies on the US, whose export performance has indeed been better than many analysts expected.
Hedge funds also made a deep cut to their net short in Chicago corn futures and options which had reached a record high a week before.
Extreme holdings, net short or net long, often prompt some reversal, with investors concerned that appetite for such bets is at its limit, and left prices vulnerable to a spike on contrary news.
And corn futures have indeed stake a notable recovery over the past two weeks, amid growing estimates for the amount of imports needed by drought-stricken southern Africa.
However, in both Chicago soft red winter wheat, and Kansas City hard red winter wheat, the level of short-covering was less than 2,000 lots, and less than investors had expected.
‘Funds could cover more shorts’
“The trade was expecting [the CFTC] report and… to show a fairly manageable net short fund positions,” said Brian Henry at broker Benson Quinn Commodities.
|Speculators’ net longs in Chicago livestock, Jan 19, (change on week)
Lean hogs: 24,188, (+1,925)
Live cattle: 15,935, (-3,450)
Feeder cattle: 1,536, (-701)
Sources: Agrimoney.com, CFTC
“That kind of wasn’t the case,” he said, terming “minor” the short-covering in Chicago.
While sympathetic to ideas of lower wheat prices ahead, “due to a lack of fundamental support and the inability to gain any more technical momentum” the CFTC data may end up offering a prop to values.
“I have to respect the idea that the funds could cover more shorts,” Mr Henry said.
Cocoa, coffee out of favour
Among soft commodities, hedge funds cut their net long in New York-traded cocoa futures and options to a nine-month low of 21,577, amid ideas that West African crops may have suffered less weather damage than investors had feared.
However, while rumours of large purchases by Cocobod, the Ghanaian regulator, and an increase in port arrivals in Ivory Coast to a nine-month low on Thursday, futures put in a strong finish to the week, helped by decent Asian grind data for the October-to-December quarter.
In New York-traded arabica coffee, speculators expanded their net short back above 25,000 contracts, even ahead of Wednesday’s report from Brazil’s official Conab bureau which forecast domestic production potentially setting a record this year.
In the livestock sector, hedge funds returned to less optimistic positioning on live cattle futures, amid ideas that fresh macroeconomic worries bode ill for beef demand.
While futures rallied late last week – ahead of data late on Friday expected to show a significant drop, of 5.5%, in placements on feedlots of cattle for fattening – in fact, the reduction came in at just 1.0%.
(Source – http://www.agrimoney.com/news/hedge-funds-cut-bearish-ag-bets-for-first-time-in-2016–9222.html)