Hedge funds lift bullish ag bets - fuelling ideas of 'overheated' coffee

01.11.2016

Hedge funds raised their bets on rises in ag commodity prices, notably in coffee in which bullish positioning hit an eight-month high, with more modest inflows into grains seen as leaving scope for buying yet.

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 19,466 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The buying took the overall net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – above 500,000 lots for the first time in three months.

The increase has come amid increasing talk of renewed fund interest in agricultural commodities, fuelled by ideas of a switch out of money from the energy and equity sectors amid increasing expectations of a rise in US interest rates.

Assets held in PowerShares DB Agriculture Fund, the biggest exchange-traded fund tracking agricultural products, gained 2.4% to $795.6m this month.

'Concerns over flowering'

The rise in the net long reflected notably an increase of more than 7,500 contracts to 50,561 lots in the net long in New York-traded arabica coffee futures and options - the biggest such number since March 2008.

The buying spree, the biggest in four months, reflected in part worries over dryness affecting the blossoming season in Brazil, and the setting of cherries for the 2017 harvest.

Rabobank flagged "concerns over the flowering in the south of Minas Gerais and Cerrado Mineiro, where it had been drier than normal before the latest rains".

Arabica vs robusta

But futures - which in the last session hit 166.40 cents a pound, the highest for a spot contract in approaching three years - have also been supported by growing values of robusta coffee, of which poor supplies, thanks to drought in parts of Brazil and other major growing countries, are prompting ideas of demand switching to arabica beans.

Speculators' net longs in New York softs, Oct 25 (change on week)

Raw sugar: 257,536, (-3,730)

Cotton: 68,030, (+3,022)

Arabica coffee: 50,651, (+7,562)

Cocoa: 23,837, (-712)

Sources: Agrimoney.com, CFTC

"The Brazil robusta production will be low again [in 2017], and robusta prices are currently very high and above arabica prices in the country," said Jack Scoville at Price Futures.

As Agrimoney.com revealed two weeks ago, robusta beans have for the first time on records going back to 2001 become more expensive than arabica coffee, which is generally considered of higher quality.

'Overbought signals'

However, substantial net long - or net short - positions can raise concerns that such a position has become "crowded" and prone to being unwound, prompting a price reversal, on a change in the news flow.

Speculators' net longs in Chicago grains, Oct 25 (change on week)

Soyoil: 115,154, (+13,893)

Soybeans: 98,605, (+10,954)

Soymeal: 14,488, (+776)

Kansas wheat: 5,405 (+4,246)

Corn: -68,962, (+1,016)

Chicago wheat: -123,387, (-21,136)

Sources: Agrimoney.com, CFTC

I&M Smith, the South Africa-based coffee trader said that "this is really an extensive net long position that is now being held within the volatile New York market".

Indeed, the "overbought signals are quite strong for this market and one might expect to see some corrective profit taking coming into play".

Arabica futures for December eased 0.5% to 164.75 cents a pound in early deals in New York, despite strong gains in the real, which would, in boosting the value of Brazilian assets, be expected to support coffee prices.

'Vulnerable to profit taking'

Similarly, cotton futures too eased in New York, by 0.5% to 70.45 cents a pound, amid comments over price levels reaching levels that have of late tended to attract fund selling, at a time when the net long, at 68,030 lots, is amongst the higher levels of the past three years.
Speculators' net longs in Chicago livestock, Oct 25, (change on week)

Lean hogs: 26,669, (-4,892)

Live cattle: 34,994, (+7,772)

Feeder cattle: -2,452, (+695)

Sources: Agrimoney.com, CFTC

"The market is once again approaching levels that have seen it become vulnerable to some profit taking," said Tobin Gorey at Commonwealth Bank of Australia.

However, by contrast, in grains and oilseeds, an increase in the net long in Chicago-traded soybean futures and options of 10,954 lots was seen as less big than some investors had expected, raising potential for further price rises.

The "smaller-than-expected managed fund soy long" – which at 98,605 lots remains at less than half June levels – combined with improved profitability prospects for US soybean crushers suggests "higher soy prices" on Monday, said Richard Feltes, at Chicago broker RJ O'Brien.

'Slightly supportive'

Meanwhile, on wheat, data showing managed money had rebuilt a large net short position in Chicago soft red winter wheat – of 123,387 lots, within 10,000 contracts of the record high – was viewed as somewhat helpful for prices too.

"The additions to the Chicago net short may be viewed as slightly supportive," said Benson Quinn Commodities.

In fact, the increased net short in Chicago wheat, the world benchmark, comes amid growing concerns over dryness testing early development of hard red winter wheat seeded for the 2017 harvest.

Hedge funds in the latest week raised their net long in Kansas City-traded hard red winter wheat to 5,405 contracts - the most in 15 months.
    


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