Hedge funds' ag sell-down rattles sugar market - but not grain investors

21.11.2016

Hedge funds turned bearish on agricultural commodities at the fastest rate in nine months, provoking hopes in grains that selling pressure may be spent for now – but spurring worries in sugar of "much lower" prices.

Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 151,096 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

That represented the biggest reduction since February in the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall.

And it came in a week in which ag bulls suffered two notable blow – the first from the rise in the dollar, following the election of Donald Trump as US president, and the second from larger-than-expected official estimates for US corn and soybean crops.

(A raised dollar weighs on the value of dollar-denominated exports, such as many ags, by making them less affordable.)

'Much more selling than expected'

Grains bore the brunt of the selling, with managed money cutting its net long in the top contracts, including soy, by more than 127,000 contracts – enough to return them to being net short in the complex for the first time in five weeks.

Indeed, the extent of the selldown surprised many investors, leading to ideas that hedge funds may have sated their appetite for bearish bets for now.

"Funds sold a lot more corn than estimated," said Terry Reilly at Chicago broker Futures International.

In fact, "it appears there was much more selling on corn, soybeans and soyoil than expected".

'Support to prices'

Ag advisory group Water Street Solutions said that for corn, "managed money was seen as big sellers again for the week ending Tuesday - taking them back to a good sized net short position".

This factor "should offer some support this week" to prices.

In soybeans, broker Benson Quinn Commodities said that the extent of selling, which took the net long back in Chicago futures and options back below 100,000 lots, should "be supportive" to prices early this week.

The broker saw potential support for wheat prices too from data showing that, in Chicago, traders had raised their net short by more than 21,000 lots in the week to last Tuesday.

"While some of the fresh short in Chicago and Kansas City was covered late this week, I would not be surprised to more short-covering" early this week, Benson Quinn Commodities said.

'Prices could head much lower'

However, for New York-traded raw sugar futures and options, in which hedge funds slashed their net long by nearly 16,000 lots, the liquidation raised fears of a snowball effect, as other speculators are tempted to follow suit.

While the selling cut the net long to 217,766 lots, the lowest level in nearly six months, it remains high by historical standards –and pre-2016 would have represented a record high.

"Almost all fund are effectively trend-seekers, so will presumably continue to follow the new [selling] trend, and in doing so, confirm it," London broker Marex Spectron said, noting the encouragement to sell presented by charts too, which show that "some of the long-term trend lines have been broken.

"If nothing happens to 'stop the rot', we think that [prices] could head lower, and maybe much lower."

On a fundamental basis, sugar selling has been encouraged by weakness in the real, which cuts the value in dollar terms of assets in which Brazil is a major force, as well as better-than-expected output in the South American country.

Cool on cocoa, more bullish on cattle

Among soft commodities, hedge funds also made a notable cut to their net long in arabica coffee futures and options, of 6,380 lots, the biggest selldown in nearly four months, encouraged by the falling real.

And in cocoa, they cut their net long below 10,000 lots for the first time in four years, in a shift Rabobank said was encouraged by "technical trading", as well as dollar strength.

However, in Chicago livestock futures and options, hedge funds raised bets on price rises, fuelling a revival in prices from multi-year lows.

In the hog market, the improved sentiment comes amid ideas that lower values have encouraged liquidation of sows, reducing the potential for herd expansion, with slaughter rates stepping up since mid-September, on a year-on-year basis.

Meanwhile, cattle futures have gained help from ideas of weak prices stemming supply expectations too.

Data on Friday showed placements of animals for fattening on feedlots, down 5.0% year on year, a bigger drop than investors had expected.


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