Hedge funds turn net short on softs for first time in two years


Speculators turned net short in soft commodities for the first time in two years, raising hopes of an easing in selling pressure on the complex as speculators mull whether they have already staked enough on this bet.

Managed money, a proxy for speculators, trimmed its net long position in futures and options in the top 13 US-traded agricultural commodities overall, including the likes of grains and livestock, by 4,806 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

However, the decline in the net short -– the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – disguised substantial differences in sentiment towards the ag subsectors.

While in grains, hedge funds cut their net short of the first time in four weeks, and in livestock raised their betting on price rises to a three-year high, in soft commodities they turned their positioning the most bearish in two years.

Softs out of fashion

Indeed, managed money turned net short in futures and options in the four main New York-traded softs – cocoa, arabica coffee, cotton and raw sugar - by 27,902 contracts, for the first time since June 2015.

Speculators' net longs in New York softs, June 6, (change on week)

Cotton: 79,927, (-6,758)

Arabica coffee: -27,410, (-2,544)

Cocoa: -27,935, (+458)

Raw sugar: -52,484, (-30,368)

Sources: Agrimoney.com, CFTC

The switch reflected an unusually strong selldown, with speculators' fresh sell bets exceeding new long holdings by 45,700 contracts week on week, the largest swing bearish in positioning in softs in 16 months.

And it reflected in particular selling in arabica coffee, in which hedge funds raised their net short position to a 19-month high of 27,410 contracts, and raw sugar, in which their hiked their bearish betting to the biggest in 22 months.

The shifts sharp price falls, with arabica coffee futures dropping 5.0% over the week, setting a one-year-low, while raw sugar futures tumbled by 6.9%, hitting a 15-month low at one point.

'Leverage for sugar bulls'

However, the extent of bearish bets that hedge funds have already put in raised hopes, particularly in sugar, that they might be wary of further sales, for fear that the position was already "crowded" and vulnerable to causing a sharp rise in prices if speculators were tempted to close up.
Speculators' net long in Chicago grains, June 6 (change on week)

Kansas wheat: 2,394 (-827)

Soyoil: -34,301, (-11,988)

Soymeal: -50,941, (-6,441)

Soybeans: -94,737 (-5,427)

Chicago wheat: -106,136, (+7,624)

Corn: -138,758, (+62,223)

Sources: Agrimoney.com, CFTC

Tom Kujawa at Sucden Financial said that the "interesting" sugar data implied "leverage" for sugar bulls.

"The net spec position was shorter than the general market consensus," he said, adding that and "we are seemingly getting to the area where those in the trade/jobbers/commercials start to warm up their trigger finger".

In the arabica coffee market, the data spurred ideas of a potential price recovery, given talk of cold weather in Brazil, the top growing country.

Corn vs soy

By contrast, among grains, including the soy complex, a reduction of 45,164 lots in the net short week on week was down in the main to Chicago corn futures and options, in which hedge funds cut their net short by 62,223 contracts.

Speculators' net longs in Chicago livestock, June 6, (change on week)

Live cattle: 128,787, (-2,159)

Lean hogs: 63,426, (+6,663)

Feeder cattle: 17,363, (+838)

Sources: Agrimoney.com, CFTC

That was the biggest turn bullish in positioning in a year, prompted by concerns over heat and dryness in the western US Corn Belt, and spurred ideas of fresh pressure on prices, in that it created scope for fresh short bets.

"Maybe funds covered a little more in corn than expected based on increasing open interest changes," Benson Quinn Commodities said.

By contrast in Chicago soybeans, hedge funds extended their net short to a two-year high of 94,737 contracts, prompting Terry Reilly at broker Futures International to advise investors to "look for additional net fund short covering" in soy, depending on what occurs in broader grain markets.

'Good demand, strong packer margins'

In Chicago-traded livestock, the rise in the net long to a three-year top reflected in the main further buying in lean hogs, futures in which remain close to one-year highs on ideas of firm demand for pork, but disappointing supplies.

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

Jun 6: -239,800, (+4,808)

May 30: -244,606, (-89,453)

May 23: -155,153, (+7,988)

May 16: -163,141, (-8,947)

May 9: -154,194, (+35,047)

May 2: -189,241, (+41,965)

Apr 25: -231,206, (-68,232)

Apr 18: -162,974, (-50,324)

Sources: Agrimoney.com, CFTC

"Good demand and strong packer margins continue to support the hog market," Water Street Solutions said.

Livestock experts at Steiner Consulting said that "slaughter so far has tracked slightly under the projections we developed" from official data in March on the herd

"Both producer and packer hog weights are now well under year-ago levels."

A seasonal decline in hog slaughter and weights "as well as strong demand have bolstered pork trim prices, which are now up 26% from a year ago," with pork belly values averaging 28% more last week than a year ago, "as retailers start featuring more bacon for Father's Day and July 4 needs".


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