Hedge funds reversed, in spades, their trend of placing bullish bets on soft commodities and bearish ones one grains, as Chicago wheat saw a rare buying spree, while sugar suffered its worst selldown in six months.
Managed money, a proxy for speculators, raised by 3,587 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.
However, as in the previous week, the modest change in the headline number for the net long – – the extent to which long positions, which benefit when prices rise, outnumber short bets, which profit when values fall – disguised strong underlying trends.
This time, it was a switch out of soft commodities – with hedge funds, unusually, net sellers of all four major New York-traded contracts – while grains saw a round of short closing which is believed to have continued late last week, spurring price gains.
‘More short-covering to come’
In Chicago wheat, hedge funds in the week to last Tuesday cut their net short by 16,011 lots from its previous record high, leaving it at a 135,406 contracts – still elevated level, and deemed by many observers a high enough figure to spur additional short-covering.
“They did cover more of their position the last couple of days,” said Brian Henry at Benson Quinn Commodities.
However, he added that “I don’t think they have covered enough of yet”.
Ag advisory group Water Street Solutions advised investors to “look for an extension of the short covering” wave by hedge funds, encouraged by a strong of purchases by big importers, such as Algeria, Egypt and Saudi Arabia, over the past week, which has encouraged price strength.
“Global values continue to grind higher and buying activity seems to be picking up.”
‘Climatic risk premium’
Paris-based Agritel flagged the potential for a further swing bullish in positioning as investors prepare for the winter which, in bringing cold temperatures to test autumn-planted wheat, often sees some risk premium injected into futures.
“The majority of bearish news are now in prices and a climatic risk premium could be integrated just before winter,” the consultancy said.
“This period is often a favourable time for short-covering.”
In Chicago corn, managed money also cut its net short substantially in teh latest week – by nearly 32,000 contracts, the biggest turn bullish in positioning in four months.
Again, Water Street Solutions flagged improved consumption trends, saying that “excellent demand is garnering more of the trade’s focus now as harvest moves past the midway point,” so easing the so-called “harvest pressure” on prices.
“September export inspections were the best since 1995,” while futures in ethanol, made in the US mainly from corn, “are trading at four-month highs,” boding well for production margins and so demand for the grain.
Meanwhile, in soybean futures and options, hedge funds raised their net long for a second successive week for the first time in four months.
‘Doubts creeping in’
By contrast, hedge funds cut their net long in the big four New York-traded soft commodities by more than 31,000 lots – the biggest selldown in eight months – with raw sugar bearing the brunt of the pressure.
Managed money slashed its net long in raw sugar alone by nearly 18,000 contracts, the largest reduction in six months, amid ideas that bullish news, such as successive world production deficits, might be priced into futures for now.
“Managed money took some profits,” Rabobank said, adding that “London sugar week provided some initial support to prices, but did not fuel a sustained rally”.
London broker Marex Spectron flagged “a feeling that doubts are beginning to creep in to the bullish consensus, and that these doubts may trickle down to the discretionary funds.
“Bulls, ie the longs, need constant feeding with bullish news, and it is hard to see where this will come from in the next few months.”
In New York-traded cotton futures and options, hedge funds cut their net long by more than 11,000 lots to a three-month low below 55,000 contracts – although may wish they hadn’t.
Futures have staged a 5% rebound since this, helped by worries over damage to the US crops from Hurricane Matthew, a surprise cut by the USDA in Wednesday’s Wasde report to its estimate for domestic stocks, and by decent US export sales data on Friday too.
“The export sales report was a very healthy 226,900 running bales which shows demand is still strong at slightly lower prices,” said traders at Ecom, noting that the figure was up 55% from the prior four-week average.
“No doubt a positive indicator for the market was the fact that China led the charge with 58,500 running bales a week, after the strategic reserve auction halted” at the end of last month – ie the close of a string of sales from Beijing’s huge state inventories.
(Source – http://www.agrimoney.com/news/hedge-funds-reverse-bullish-softs-bearish-grains-betting-on-ags–10035.html)