When hedge funds make huge selldowns in agricultural commodities, as they did in the latest week, a big question is whether that inspires a bit of a reversal.
Did managed money, in turning a net seller of more than 250,000 contracts, the largest on data going back to 2006, sate its appetite for selling?
Will speculators be tempted to take profits on short bets, and send prices higher, before peers step in?
The answer to both questions, to judge by early trading on Monday, was “not really”, although wheat did manage something of a rebound.
‘Leaning too short’
In Chicago soft red winter wheat futures and options, hedge funds hiked their net short by nearly 39,000 lots in the latest week, a record, and taking the total net short to within 5,000 contracts of the record high set in April.
In Kansas City hard red winter wheat, the net short, of 31,139 lots, was indeed a record high.
“Considering that they added these shorts near contract lows, I believe they are leaning too short in Chicago and Kansas City wheat,” broker Benson Quinn Commodities said.
“I look for this report to offer support” to prices early in the week.
And prices indeed gained, with Chicago wheat for March, now the spot contract after the expiry of the December lot, adding 0.9% to $4.22 a bushel as of 11:00 UK time (05:00 Chicago time), returning back above its 10-day moving average.
Kansas City wheat for March added 0.8% to $4.20 ¾ a bushel, returning above its 10-day moving average too.
Also supportive was continued comment on a 130,000-tonne export sale of US soft red winter wheat unveiled on Friday, to an “unknown” importer, and which is an unusually large order for the grain.
The last time orders reached 130,000 tonnes over a single week was in July 2015.
‘Hard for the US to compete’
Also, Informa data on Friday was also receiving a continued airing, and a forecast of US winter wheat area of 31.1m acres for the 2018 harvest, the lowest since 1909, and below a previous estimate of 31.923m acres.
“Wheat is such a global commodity it’s hard for the US to compete in a big way,” said Water Street Solutions.
And it looks especially unappealing when US Department of Agriculture cost of production data on Friday showed wheat returns are $180 per acre over variable costs, according to Richard Feltes at RJ O’Brien.
That compares with $316 per acre for soybeans, and returns of $343 per acre for corn.
‘Crops are insufficiently developed’
And, staying on the positive side for prices, there remain concerns over dryness in the US Plains hard red winter wheat country too.
There, a water deficit “this autumn did not allow to seed all wheat acreage, and crops are insufficiently developed at this stage of the year,” said Agritel.
Furthermore, Water Street Solutions noted that “basis in wheat is improving, for a change, as the futures continues to step lower”.
Russian export splurge
That said, RJ O’Brien’s Richard Feltes noted that “trade is not overly concerned over below-average winter wheat growth,” flagging that the dry conditions since seeding were “proceeded by delayed planting due to wet soils.
(Still, the market is “fully aware that timely/measurable spring rains are key to matching recent years with above-average yields”.)
And as a bigger caution for wheat bulls, Russia pegged its wheat exports for 2017-18 at a massive 40m tonnes, well above forecasts from other commentators, with the USDA, for instance, at 33.5m tonnes.
That is a stark reminder of the huge level of shipments Russia has left to shift, and at competitive prices, although the ringgit was 0.4% stronger against the dollar in early deals, at 58.6 per $1.
But corn futures found it difficult to follow wheat, standing flat at $3.47 ½ a bushel for March delivery, and earlier matching a contract low of $3.46 ½ a bushel.
The hedge fund positioning data for the grain were not so extreme, with net selling of 36,000 contracts last week not at all unprecedented, if the largest in three months, and a net short of 197,192 contracts leaving a bit of room before testing the record 230,556 lots set last month.
Furthermore, worries over Argentina are on the slide (although mainly a factor for the soy markets).
“Beneficial rains have touched Argentina during the weekend, relieving the hydric stress in place in the country,” Agritel said.
MDA said that “scattered showers occurred in eastern La Pampa, Buenos Aires, Santa Fe, western and central Cordoba, and Entre Rios,” bringing typically 0.25-1.25 inches, but with some downpours of 3.5 inches.
This week, “expected showers in eastern and central crop areas will improve moisture and crop conditions”, the weather service added.
‘March down the channel’
Technical factors are unhelpful too for bulls, according to Water Street Solutions, which said that March futures were “continuing to march down the channel” dating from early September.
“If we can’t stabilise here, look for lower targets of $3.45 and $3.39 a bushel.”
Meanwhile, Informa on Friday pegged the US corn yield this year at 176.6 bushels per acre, which would be a record, and above the USDA’s current estimate of 175.2 bushels per acre.
At least Informa offered bulls some relief by trimming its forecast for 2018 US corn sowings, to 89.7m acres, from a previous estimate of 91.4m acres.
Also, there are growing doubts over the level of Brazilian safrinha corn sowings early in 2018, with AgRural saying low corn prices may fuel a drop in seedings to 10.8m hectares, from 12.1m hectares for this year’s crop.
‘Funds continue to back off’
Soybeans for January held at $9.67 ¼ a bushel, although later expiry contracts eased.
And, indeed, the oilseed lacked the support from hedge fund positioning data, which showed a continued net long in soybean futures and options, after a large but not unprecedented selldown, of 33,379 contracts.
“Funds continue to back off their soybean ownership,” said Water Street Solutions.
“In the US, supplies are large, exports are behind and the exchange rate versus Brazil has been problematic.”
‘An all-time record’
And then, there were the Argentine rains to factor in too.
But bulls could point to industry data on Friday showing a 163.5m-bushel US soybean crush last month, some 400,000 tones above market expectations, and a 2.8% rise year on year.
“At 5.45m bushels a day, November came in at an all-time record [for the month], beating out 5.36 previous record of November 2016,” Terry Reilly at Futures International said.
Data on soyoil stocks, at 1.326bn pounds, were deemed less positive for prices, coming in 57m pounds ahead of market expectations.
Still soyoil futures for January added 0.5% to 33.31 cents a pound, more than recouping modest losses in the last session.
‘Very few bearish cases to be made’
One ag where bulls have gained the whip hand is in cotton, helped by worries over pest damage to India’s crop, and of quality setbacks in the latest US harvest, at a time of large demand for US supplies.
“There are very few bearish cases to be made for cotton in the short term,” Ecom said.
“Harvest concerns remain with quality and ginning/warehouse delays.
“Export demand continues as well with another 300,000 running-bale export sales report” last week.
‘Concerns regarding cancellations’
However, the trading house did flag one potential pressure on prices, from Pakistan, where a weaker currency may undermine its appetite for cotton imports.
“Pakistan announced a currency devaluation last week which has already had near a 3% impact on their purchase power, and could become larger, as the IMF is negotiating a settlement,” Ecom said.
“Either way, there are concerns regarding cancellations and a diminished demand in the coming months.”
New York cotton futures for March eased by 0.1% to 75.87 cents a pound.
(Source – https://www.agrimoney.com/news/morning-markets-extent-of-hedge-fund-selldown-helps-wheat-futures-47556)