Hedge funds wrong-footed by talk of Trump biofuel shake-up

06.03.2017

The rumour mill surrounding US President Donald Trump squeezed ag speculators - spurring a sharp rally just after hedge funds had undertaken a major selldown, including their biggest turn bearish on softs in more than a year.

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 nearly 123,000 contracts in the last week of February, analysis of data from the Commodity Futures Trading Commission regulator shows.

While the cut in the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – was led by grains, it was particularly notable in New York-traded soft commodities, in falling by more than 38,000 contracts.

That was the biggest selldown in the complex since early February last year, and included fresh selling in cocoa, in which hedge funds expanded their net short to a fresh record high, and raw sugar, in which the net long was slashed to a 10-month low.

'Thrown into a frenzy'

However, the selling came ahead of a firm finish to the week for agricultural commodities, spurred largely by talk that Mr Trump was to introduce US biofuels reforms likely to spur demand for both ethanol, processed largely from corn, and biodiesel, which is made from vegetable oils such as soyoil.

"The corn market was thrown into a frenzy as statements from the Renewable Fuels Association indicated a big change to the ethanol industry," said Joe Lardy at CHS Hedging.

"The soybean market went crazy as rumours of a change to the biodiesel mandate was going to occur by executive order. The soyoil market rocketed higher and pulled beans with it."

While the White House denied any executive order was in train, investors are still "wondering if and when an announcement is coming", Mr Lardy said.

'Screaming higher'

In Chicago soyoil, the rally in prices from five-month lows followed a particularly sharp selldown, of more than 40,000 lots over two weeks, the biggest for any fortnight since June 2015.

While the selling, which "likely reversed that trend after the biofuel fireworks hit the market, sending soyoil screaming higher", as Terry Reilly at Futures International noted, it left hedge funds' latest short positions under water.

The total number of short bets in soyoil as of last Tuesday, at nearly 40,000 lots, was at its highest since August.


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