Hedge funds extend ag selling spree to second-longest on record

24.04.2017

Hedge funds extended their shorting spree on agricultural commodities to the second longest on record, prompting ideas that selling may have gone too far – with one commentator likening the wheat market to a geyser about to blow.

Managed money, a proxy for speculators, expanded its net short position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by 50,324 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The move represented a ninth successive week in which hedge fund sales have exceeded purchases – a spree exceeded only once on records going back to 2006 – and one which raised the net short to 162,974 contracts.

The selldown echoes a broader discontent by investors with commodities, with a monthly survey last week from Bank of America Merrill Lynch showing a majority of fund managers returning to an "underweight" position on the asset class, by the biggest margin in months.

'Could find support'

However, some commentators have raised doubts about the potential for the reversal in commodity values to continue, with Water Street Solutions, for instance, saying that "global demand remains good creating doubt that we'll see a collapse here for commodities.

Indeed, "commodities could find support on a breakdown of the dollar from its recent trend", with any future weakness in the greenback boosting the affordability of exports, such as many raw materials, denominated in the currency.

In grains in particular, analysts raised ideas that hedge funds had raised their net short further than had been thought – to 419,665 contracts, the second highest on data going back to 2006 – potentially stemming the appetite for further sales and, indeed, provoking the likelihood of support to prices from short-closing.

"The funds sold more than expected contracts for all the major agriculture commodities we track," said Terry Reilly at Chicago broker Futures International.

At RJ O'Brien, Richard Feltes said that hedge funds' short betting on row crops was "larger than expected", a factor which could provide support to prices.

'Don't start getting bearish here'

The extent of the net short in corn has surprised many commentators in coming at the start of US spring sowings – a process which, in being weather dependent, often sees investors inject a little risk premium back into prices.

Water Street Solutions said that the extent of the managed money net short in Chicago corn futures and options, at a six-month high, "will provide fuel for short covering opportunities".

For Chicago-traced soft red winter wheat, in which hedge funds raised their net short to 142,126 lots, the second highest on record, even as futures are close to their weakest in a decade, the ag advisory group foresaw conditions for a price surge ahead it likened to the blowing of a famous geyser in Yellowstone National Park.

The combination of already-low prices and a hefty net short position in Chicago, where funds' "net short is twice the soft red wheat that gets raised in the US, leaves one feeling like a visit to Yellowstone and waiting for hours to see 'Old Faithful' blow, but yet to be entertained", Water Street Solutions said.

"While it's hard to get bullish [on wheat], don't start getting bearish here."

Chocolate drops

In New York-traded soft commodities too, hedge funds turned more bearish, cutting their net long for an eighth successive week, to a 13-month low of 88,558 lots.

The retreat reflected in part fresh selling in cocoa, in which ideas of large supplies, as encapsulated by comments from broker Marex Spectron, drove futures on Thursday to a fresh nine-year low of $1,805 a tonne on a spot contract basis.

However, managed money also extended its retreat from raw sugar, for an eighth successive week, amid hopes of a rebuild in supplies ahead as Brazil starts its new cane crushing season – although India's agreement to imports has at least allowed prices to stabilise this month.

Bullish on cattle

In the Chicago livestock complex, managed money made a small shift bullish in positioning, reflecting buying in live cattle futures and options, in which the speculative net long reached its highest in nearly three years.

Such positioning has provided gains to hedge funds, as spot futures touched a one-year high of 130.40 cents a pound last week, their highest for a year, in a rally attributed to a strong US cash cattle market and a fresh gains in beef values, supported by decent exports.

However, the market faces a key test, after the release late on Friday of US Department of Agriculture data showing that feedlots had increased buy-ins of cattle for feeding up by 11.0% year on year in March.

At 2.10m head, that was a record high for the month on data going back 21 years, and was above market expectations of a 6.0% increase.

Placements vs marketings

At Commonwealth Bank of Australia, Tobin Gorey said that the surge in placements was "partly due to the expanding US herd and partly as cattle producers look to capitalise on the recent run up in prices".

He added: "The report may be viewed as somewhat bearish by traders today, but perhaps not as much as normal.

"Feedlot marketings during March remained very aggressive, up 9%, which means the pipeline is effectively digesting the available numbers."


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