Hedge funds' sell-off in grains raises hopes for corn, wheat rallies

19.07.2016

The extent of hedge funds' selldown in grains, while continuing to raise bullish bets on soft commodities, raised ideas that the worst could be over for liquidation in corn and wheat– if not for soybean derivatives.

Managed money, a proxy for speculators, slashed its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to cocoa, by 114,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The drop in the net long - the extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall – reflected in particular a cut in grains, as improved US weather prospects have prompted an exodus of risk premium.

The net long in grains, including the soy complex, fell below 100,000 lots for the first time since April.

It also fell for a fourth successive week, a period during which the net long has slumped by nearly 440,000 contracts – the second-biggest such decline on data going back a decade.

'Will reduce selling pressure'

The drop in the latest week was led by Chicago corn futures and options, in which hedge funds slashed their net long by more than 94,000 contracts, the third-biggest selldown on record, as the US Midwest weather threat subsided.

Speculators' net longs in Chicago grains, July 12 (change on week)

Soybeans: 159,407, (-7,921)

Soymeal: 61,935, (+530)

Corn: 8,702, (-94,401)

Soyoil: 559, (-1,325)

Kansas wheat: -18,717, (-1,898)

Chicago wheat: -114,668, (-12,424)

Sources: Agrimoney.com, CFTC

"Managed money cut the most [contracts] since April 2013 to reach an 8,702-lot net long position, on expectations of comfortable 2016-17 US stocks," said Rabobank.

And funds have, since the data were taken, likely sold down further and are "probably short right now", said Benson Quinn Commodities.

However, the extent of the reduction could mean that speculators' appetite for selling is sated for now, with the Minneapolis-based broker adding the data "will take sell pressure off trade" this week, and could set the scene for a rally if the Midwest weather outlook turns less benign and "funds step back into the fray".

At Water Street Solutions, Darren Frye said that "much of the weather premium has been sucked out of the market, for now.

"Rallies over the next few weeks to $3.85-4.00 a bushel are plausible," compared with the $3.60 a bushel at which December futures were trading at on Monday.

'Should allow a post-harvest rally'

Similarly for Chicago wheat, in which hedge funds raised their net short to a record high of 114,668 lots amid ideas of ample world supplies, the extent of the sell-down could deter further bets on price falls.

Speculators' net longs in New York softs, July 12 (change on week)

Raw sugar: 253,421, (-4,774)

Cotton: 49,519, (+11,419)

Cocoa: 39,836, (+2,373)

Arabica coffee: 35,154, (+2,753)

Sources: Agrimoney.com, CFTC

"The record short fund position should provide some stability to price," Mr Frye said, adding that the market was vulnerable to "a short covering rally down the road on a headline" negative on wheat output.

"Short positions of this size should allow a post-harvest wheat rally to materialise eventually," Benson Quinn Commodities said.

However, the broker was less upbeat on the price signals from CFTC data for Chicago soybean futures and options, which showed managed money "only liquidated a small portion of its long position", which remained close to 160,000 contracts.

"If weather does prove moderate in August, then the funds are still too long assuming trend yield of 46.7 bushels per acre," and US soybean stocks of 290m bushels at the close of 2016-17, as expected by the US Department of Agriculture.

Fibre in focus

In contrast to grains, hedge funds raised their net long in New York-traded soft commodities for a seventh successive week, the longest buying streak in more than two years.
Speculators' net longs in Chicago livestock, July 12, (change on week)

Lean hogs: 59,617, (-8,724)

Live cattle: 19,798, (+277)

Feeder cattle: -3,065, (+115)

Sources: Agrimoney.com, CFTC

The increase, which took the total net long to a fresh eight-year high of 377,480 lots, was led this time by cotton, in which hedge funds raised their net long to a 2016 high.

The buying, which helped cotton futures hit a succession of two-year tops, was encouraged by an unexpectedly large downgrade by the USDA on Tuesday to its estimate for world stocks of the fibre as of the end of 2016-17.

Speculators also raised their net long position on arabica coffee futures and options to a 19-month high, encouraged by an unexpected squeeze on Brazilian exports, as Brazilian producers, seeing tight domestic carry-in supplies, prove reluctant to sell their bumper harvest.

'Just not enough'

In the livestock sector, hedge funds enacted a hefty selldown on Chicago-traded lean hogs, amid disappointment at some demand signs.

"A lot of hopes were pinned on the US export story and the possibility for a runaway pork market this summer," Paragon Economics and Steiner Consulting said in a report

"So far exports have been good, as expected, but just not enough to pull the cut-out in the mid-90s" dollars per hundredweight."

The softer-than-expected performance likely reflects lower beef prices, the groups said.

"For retailers looking to maintain their sales dollars up, promoting steaks and ground beef certainly made more sense than running pork chop sales this summer."


agrimoney

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