Hedge funds extend net short in grains - provoking ideas of price support


Hedge funds returned to a swing bearish in positioning on agricultural commodities - led by a selldown in grains which some analysts mulled may be ill-timed and lead to upward pressure on prices.

Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 46,288 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The reduction in the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – took it to some 328,000 contracts, the lowest in five months.

And it reflected a return to the "sell grains-buy soft commodities" pattern prevalent since April, driving the net short in grains (including the soy complex) above 150,000 contracts for the first time in six months.

'Record large usage'

The grain selling was driven by an increase of more than 15,000 contracts to 176,844 lots in the managed money net short in Chicago corn futures and options – a pattern typical at this time of year, when the ramp up of the US harvest raises supplies and shifts market power to buyers.

Speculators' net longs in Chicago grains, Sept 27 (change on week)

Soyoil: 94,192, (+11,951)

Soybeans: 57,652, (-32,781)

Soymeal: 11,148, (-19,448)

Kansas wheat: -5,498, (+2,900)

Chicago wheat: -131,417 (-4,152)

Corn: -176,844, (-15,252)

Sources: Agrimoney.com, CFTC

In Chicago-traded soybeans, hedge funds slashed their net long by nearly 33,000 contracts, the biggest sell-off since March.

Ag advisory group Water Street Solutions noted that this left speculators "only now net long 57,652 contracts", the lowest in six months.

However, the selldowns have looked more questionable since the US Department of Agriculture on Friday unveiled data on US crop inventories as of September 1 which, according to Joe Lardy at broker CHS Hedging implied that "soybean usage for the [June1-September 1] quarter was record large.

"It was so large that it doubled the amount used in both 2013 and 2014."

'Look supportive'

Meanwhile, for corn, the inventory data showed stocks coming in below expectations, implying more use of the grain in livestock feed than had been expected.

Speculators' net longs in New York softs, Sept 27 (change on week)

Raw sugar: 286,248, (+1,800)

Cotton: 72,016, (+6,226)

Arabica coffee: 44,682, (-2,026)

Cocoa: 20,311, (+4,503)

Sources: Agrimoney.com, CFTC

"In fact, corn demand [for the quarter] was the best since the 2009-10 season," said Terry Reilly at Futures International.

The dynamics helped ideas that corn and soybeans may be able to continue their counter-seasonal price resilience, with corn futures now more than 7% above a late-August low.

The hedge fund position data "look supportive going into new month with funds increasing corn short to 191,510 contracts… and reducing its soybean long", broker Benson Quinn Commodities said.

'Still immense'

By contrast, in New York-traded soft commodities, hedge funds raised their net long to a record 423,258 lots, helped by a nudge higher in the net long in raw sugar futures and options higher to an all-time high of 286,248 contracts.

"We may get used to it, but it is still immense," broker Marex Spectron said of the extent of bullish positioning in sugar.

And in cotton, managed money raised its net long above 72,000 lots for only the third time in the past three years – ahead of an easing in prices.

Indeed, the week "saw another large addition of long hedge fund positions", said Dr John Robinson cotton marketing expert at Texas A&M University, flagging support to cotton prices from futures which were "consistently higher" last week on the Zhengzhou exchange in China.

However, this time of year, in bringing the US harvest, often brings downward pressure to cotton prices, with Louis Rose at the Rose Report that "with the thrust of the US harvest season upon us… thus far, US grades have been generally strong, and the current weather forecast looks favourable for harvest over the near- to medium-term".

'Sour note'

In the Chicago-traded livestock sector, hedge funds looked wrong-placed too in raising their net long in live cattle, again – ahead of a sharp retreat in prices, which closed the last session at 98.90 cents a pound, the first finish below 100 cents a pound for a spot contract in nigh on six years.
Speculators' net longs in Chicago livestock, Sept 27, (change on week)

Lean hogs: 72,019, (-4,790)

Live cattle: 33,037, (+5,892)

Feeder cattle: -4,333, (-1,111)

Sources: Agrimoney.com, CFTC

Indeed, the market "finished the week on a sour note as cash cattle traded limit down and the slower purchases last week brought 30,000 more animals for sale this week," Water Street Solutions said.

The "market concern" is that October being "pork month" in the US "will shift focus away from beef at the supermarkets and restaurants".

Paragon Economics and Steiner Consulting flagged the prospect of a rise of 3-3.5% year on year in the number of cattle coming to market over the October-to-December period, if being a reduction on the "torrid" 7% increase seen in the July-to-September period.

"The challenge is that feedlots have a strong incentive to stay aggressive in marketing cattle.

"There are more calves in the country that will become available for placement in the next few months and feed costs are low."

Low on the hog

In lean hogs, hedge funds proved justified in turning more bearish but, in retaining a net long of more than 26,000 lots, looked to be swallowing losses on this contract too, as

Chicago lean hogs on Friday closed at 49.025 cents a pound for October delivery – taking losses for last month to 22%, and representing lowest close for a spot futures contract in seven years.

Water Street Solutions flagged a "continued seasonal build of supplies and caution ahead" of a key quarterly USDA report on the hog herd – which itself showed a bigger herd than anticipated, raising the potential for further price declines ahead.

The report showed that the US hog herd in the June-to-August period was 2.0% higher year on year, compared with market expectations of 1.2% growth.

The number of large hogs, weighing more than 120 pounds, rose by 4%.


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