Hedge fund dynamics mean 'feeder cattle prices to underperform'

17.10.2017

The extent of hedge funds' bets on rising feeder cattle prices, even while selling down in the agricultural commodities, has left the contract "likely to underperform", Societe Generale said.

Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to hogs, by 24,529 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

However, Chicago-traded livestock derivatives escaped the selldown, with hedge funds raising their net long in the complex for a fifth successive week, this time by 7,215 contracts.

The net long is the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall.

The livestock buying has defied the apparently bearish dynamic of US herd rebuilding which has enabled higher slaughter rates, up some 3-4% year on year for both cattle and hogs.

'Solid demand'

However, livestock prices have revived nonetheless, with spot futures in live cattle - animals finished for slaughter - recovering some 8% from a late-August low, and lean hogs bouncing some 13% in three weeks.
Speculators' net longs in Chicago livestock, Oct 10, (change on week)

Live cattle: 100,178, (+3,496)

Lean hogs: 59,515, (+2,969)

Feeder cattle: 17,671, (+750)

Sources: Agrimoney.com, CFTC

"Solid meat protein demand" has been the "general theme for livestock markets this past spring and summer, and the trend has conti

nued into early fall", said Steiner Consulting, also noting that "some of the increase in slaughter has been offset by lower carcass weights".

Still, the extent of fund buying in feeder cattle – animals yet to be fattened – which has fuelled a 13% bounce in pries from an August low, may prove misplaced Societe Generale, noting that managed money's gross long in feeder cattle futures and options had hit a record high of 24,000 lots.

The CFTC data show "money managers significantly more stretched on Chicago feeder cattle compared to live cattle", SocGen said, noting also that the number of funds holding short positions in feeder cattle, at 16, was well below the 48 holding long bets.

The bank said its analysis of the extent and concentration of fund positioning "shows that feeder cattle is likely to underperform live cattle in the near future.

'Vulnerable to short-covering'

Indeed, feeder cattle derivatives were "overbought" and "vulnerable to profit taking", SocGen said – contrasting with those in New York-traded raw sugar, in which managed money nudged higher its net short position for a third successive week.

Speculators' net longs in New York softs, Oct 10, (change on week)

Cotton: 52,169, (+937)

Cocoa: -21,560, (+4,424)

Arabica coffee: -32,124, (-4,993)

Raw sugar: -90,998, (-47)

Sources: Agrimoney.comn, CFTC

Raw sugar remains "oversold" and "vulnerable to short-covering", the bank said.

Separately, broker Marex Spectron said that the market might "seen some fund short-covering" if the March raw sugar contract, trading on Monday at 14.31 cents a pound, manages a close above its 50-day moving average at 14.41 cents a pound.

SocGen also returned New York-traded arabica coffee to an "oversold" rating, leaving it vulnerable to short-covering, after hedge funds in the latest week expanded their net short to a three-month high of 32,124 lots.

'Growing interest in commodities'

In fact, upward moves appear to be the default direction for raw material prices overall, with ag advisory group Water Street Solutions saying that "global interest in commodities continues to grow on economic growth"

Managed money net long in top 13 US-traded ags and (change on week)

Oct 10: -77,793, (-24,529)

Oct 3: -53,264, (-66,648)

Sep 26: 13,384, (+27,688)

Sep 19: -14,304, (+58,746)

Sep 12: -73,050, (+57,427)

Sep 5: -130,477, (-2,566)

Sources: Agrimoney.com, CFTC

"The US dollar struggled last week on growing doubt of tax reform," with a weaker dollar boosting the affordability of dollar-denominated assets, such as many commodities.

Meanwhile, "the commodity indexes broke up through resistance", with the CRB index gaining 2.1% last calendar week to set its best close since May, and the Bcom index adding 2.2% last week to set its best finish since April.

'Short on interest at selling'

However, in grains, hedge funds appear to be willing to extend bets on price falls, raising their net short in Chicago wheat futures and options in the week to last Tuesday for the first time in five weeks, while hiking their net shot in corn to a four-month high.
Speculators' net long in Chicago grains, Oct 10 (change on week)

Soybeans: 30,992, (+3,234)

Soyoil: 23,132, (-7,584)

Soymeal:  13,055, (+11,900)

Kansas wheat: 843, (-8,625)

Chicago wheat: -67,729, (-11,254)

Corn: -162,937, (-19,736)

Sources: Agrimoney.com, CFTC

Still, some commentators flagged cause for believing that funds may baulk at expanding bearish bets too much further.

Benson Quinn Commodities noted that in wheat, trading volume "remains light as there just isn't much incentive, reason or justification for putting on a big position in the current environment".

On corn, Water Street Solutions noted that funds were "already short and farmers short on interest at selling at these levels", limiting the potential for further selling pressure.


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