Fund data reveal 'flow of fresh speculative money' into ags

25.10.2016

Data on hedge fund bets underlined the increased appeal of agricultural commodity investments – flagging a "flow of fresh money" into the sector, besides a hefty wave of closing of short bets.

A report from US regulators backed ideas Agrimoney.com has highlighted last week of renewed fund interest in the top 13 US-traded agricultural commodities, showing an increase to more than 7m contracts in open interest – that is, the number of "live" contracts – in the week to last Tuesday.

"Total open interest across agri markets increased for the fifth consecutive week, driven by a flow of fresh speculative money," Rabobank said.

The figure signalled the more nuanced picture behind the recent recovery in grain prices than just covering of short bets, spurred by the revelation two weeks ago that US wheat export prices were the world's lowest, besides the passing of the US corn and soybean harvest into its latter stages.

Not just short-covering

The data from the Commodity Futures Trading Commission on top US-traded ags showed managed money raising its net long position - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall - by more than 145,000 lots during the week.

Speculators' net longs in Chicago grains, Oct 11 (change on week)

Soyoil: 101,261, (+19,452)

Soybeans: 87,651, (+14,582)

Soymeal: 13,712, (+1,194)

Kansas wheat: 1,159 (+7,028)

Corn: -69,988, (+60,995)

Chicago wheat: -102,251 (+33,155)

Sources: Agrimoney.com, CFTC
However, while that was down largely to a cut of 75,000 lots in gross short bets in grains and oilseeds – representing the biggest short-covering wave in nearly six months – fresh bets on price rises accounted for a big chunk of the switch too.

The number of fresh long positions in grains and oilseeds rose by more than 61,000 lots to a three-month high of 628,504 contracts.

In New York-traded soft commodities too, the extent of short-closing and fresh long bets was evenly matched, at a little over 6,000 contracts apiece.

'Negative tone'

It is difficult to gauge whether hedge fund cash inflows into ags will continue, a factor which often reflects returns to be had in other sectors, with the idea that higher US interest rates will hold back share market gains seen as one factor boosting the appeal of commodities of late.

Speculators' net longs in New York softs, Oct 18 (change on week)

Raw sugar: 261,266, (-6,580)

Cotton: 65,508, (+10,514)

Arabica coffee: 43,809, (+6,738)

Cocoa: 24,549, (+2,340)

Sources: Agrimoney.com, CFTC
However, on short-covering, some investors viewed the latest CFTC data as a negative signal for corn prices, in showing that – with the speculative net short down nearly 61,000 lots week on week – a stack of support to the market from this source had already run its course.

Broker Benson Quinn Commodities, noting that hedge funds now had a "manageable net short of 69,978 contracts," said that "Combined with the weakish tone in the technicals, it doesn't look like there is a good reason to expect the funds to stay on the buy side in the corn market".

The CFTC data offered a "negative tone" to the corn market.

At Commonwealth Bank of Australia, Tobin Gorey, terming the short position on corn "neither here nor there", said that "perhaps the short covering boost has now run its course".

'Heavily short'

However, for Chicago wheat, comments were more mixed on whether the short-covering support for prices was over, despite a cut in the managed money net short of more than 33,000 lots week on week.

Speculators' net longs in Chicago livestock, Oct 18, (change on week)

Lean hogs: 31,561, (-322)

Live cattle: 27,222, (-3,769)

Feeder cattle: -3,147, (+168)

Sources: Agrimoney.com, CFTC
At Benson Quinn Commodities, Brian Henry said that "while still short in Chicago, I believe funds have covered enough of their short position".

However, ag advisory group Water Street Solutions said that even after the latest shift, speculators have "still a large net short of -102,251 contracts".

CBA's Tobin Gorey said that the data "showed that investors remain heavily short, so there is also potentially a substantial buyer on the market from time to time".

'Price pressure ahead'

Among soft commodities, hedge funds cut their net long in New York raw sugar for a third successive week for the first time in three months, encouraged by an accelerated cane harvest in Brazil's Centre South region, where mills are also turning more than half of the crop into sugar rather than ethanol.

However, in cotton, managed money hiked its net long by more than 10,000 contracts, helped by an unexpectedly large downgrade by the US Department of Agriculture on October 12 to its forecast for both domestic and world inventories of the grain.

This could bode ill for prices ahead, as the net long position is unwound, Mr Gorey said.

"While investors are not quite as bullish as they were in September, their long position is still sizeable enough that, should they have reason to liquidate it, they would not be able to do so without pushing prices sharply lower for a period."


agrimoney

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