Hedge funds less chilly on ags, as commodity sentiment warms


Hedge funds near-eliminated their bearish bet on agricultural commodities, amid a positive trend towards raw materials which has left many contracts "overbought" – although only one in the ag complex.

Managed money, a proxy for speculators, cut its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to cotton, by 54,746 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The shift reduced the net short - the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain - to 14,304 lots, down by more than 116,000 contracts over two weeks.

And it came amid improvement in investor sentiment towards commodities, which helped the CRB index last week hit a four-month high, taking to 11% its recovery from a 14-month low set in late June.

'Risk of widespread profit-taking'

The rise in commodity values is being fuelled by weakness in the dollar, which boosts the affordability of exports, such as many raw materials, which are denominated in the currency.
Speculators' net long in Chicago grains, Sep 19 (change on week)

Soyoil: 92,870, (-7,565)

Soybeans: 16,919, (+14,898)

Kansas wheat: 12,415, (-616)

Soymeal: -31,817, (+4,527)

Chicago wheat: -79,568, (+4,177)

Corn: -134,606, (-15,194)

Sources: Agrimoney.com, CFTC

Commentators have pointed to other signals too, including a recovery in freight rates, seen as a potential pointer of higher commodities demand, with the Black Dry freight index on Friday topping 1,500 points for the first time since March 2014.

Based on the strength in freight rates, "economists are suggesting the world is about to show strong commodities growth going forward," Sucden Financial noted last week.

However, the extent of speculators' renewed attraction to raw materials has created the "risk of widespread profit-taking across key commodities", Societe Generale said, comparing latest CFTC hedge fund position data with historical levels, and with the relative strength of prices.

'Vulnerable to short-covering'

The bank named eight contracts as "overbought" and "vulnerable to profit-taking", including Brent crude, gold and palladium, and gasoil in which it noted managed money had a record net long position on data going back to 2006.

Speculators' net longs in New York softs, Sep 19, (change on week)

Cotton: 63,339, (-6,945)

Arabica coffee: -16,482, (+13,949)

Cocoa: -39,499, (+7,536)

Raw sugar: -67,396, (+24,004)

Sources: Agrimoney.comn, CFTC

Among agricultural commodities, Chicago-traded feeder cattle was the only contract included in this overbought category, with hedge funds in the latest week increasing their net long to a six-week high.

By contrast, the only two commodity contracts SocGen termed "oversold" and "vulnerable to short-covering" were in the softs complex, in New York-traded raw sugar and cocoa.

The analysis came despite a further shift positive in the latest week on managed money bets on soft commodities, in which speculators are now at their most bullish compared with grains in three months.

'Only buyer of any size'

In fact, in raw sugar, hedge funds slashed their net short position in the week to last Tuesday by 24,000 contracts to the smallest in a little over three months, amid ideas of Brazilian mills swinging cane crushing towards making ethanol rather than sweetener.

Speculators' net longs in Chicago livestock, Sep 19, (change on week)

Live cattle: 86,652, (+4,400)

Lean hogs: 56,732, (+903)

Feeder cattle: 14,411, (+1,049)

Sources: Agrimoney.com, CFTC

Still, the report "suggests, as most already suspected, that the only buyer of any size is investors buying back short positions", said Tobin Gorey at Commonwealth Bank of Australia.

Separate data on commercial positions indeed showed an increase in the net short to a three-month high, thanks to a large drop in long bets.

Mr Gorey added that the hedge fund net short position "probably remains large enough to provide support for the market for another week or so".

'Dry weather was the trigger'

Still, perhaps the most notable shift in hedge fund positioning was in arabica coffee, in which managed money cut net short by nearly 14,000 contracts – the biggest swing bullish in positioning in 15 months.

"The dry weather in the Brazilian arabica belt was the trigger" for the buying, said Rabobank, with the conditions raising concerns about the success of flowering ahead of the 2018 harvest, although the bank added that "we see some rains this week".

Rabobank noted that arabica coffee prices "remained virtually unchanged" over the week besides the hedge fund short-covering.

However, the data on commercial positions showed an unusually large selldown in this segment, of more than 11,500 contracts.

Soyoil vs soymeal

Among the grain complex, including soybeans, hedge funds proved net buyers overall, of nearly 14,000 lots.

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

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

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

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

Aug 29: -127,911, (-47,245)

Aug 22: -80,666, (-178,404)

Aug 15: 97,738, (-173,212)

Sources: Agrimoney.com, CFTC

But this was largely down to short-covering in soymeal, balanced to come extent against selling in soyoil – a spread often played by speculators.

"Traders unwound soyoil and soymeal spreads as strong meal demand in both the US and China supported prices ahead of the US harvest," Rabobank said.

There were also signs of long soybean-short corn bets, with sentiment of the oilseed being supported by strong demand lacking for the grain.

Hedge funds returned to a net long in Chicago soybean futures and options for the first time in seven weeks, while extending their net short in corn to a three-month high.


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