Hedge funds extend bullish ag spree to longest in two years

Hedge funds extended their buying streak in agricultural commodities to the longest in two years, led by appetite for the soy complex – which more than offset the biggest sell-down in sugar in nine months.

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 cocoa, by 35,925 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The rise took the overall net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 536,493 lots, the highest since July.

And it came despite a marked cut in bullish positioning on New York-traded soft commodities, as investors soured towards long bets in raw sugar futures and options, swamping a further increase in bets on coffee price rises.

‘Change of attitude’

Indeed, in raw sugar, managed money cut its net long by more than 29,000 lots – the biggest selldown since February, and fuelling a near-8% slump in prices during the week to last Tuesday.

Speculators’ net longs in New York softs, Nov 1 (change on week)

Raw sugar: 228,342, (-29,194)

Cotton: 67,605, (-425)

Arabica coffee: 56,621, (+5,970)

Cocoa: 23,870, (+33)

Sources: Agrimoney.com, CFTC

“Good rainfall in Brazil, political uncertainty in the US and relatively few potential bullish events in the coming months have lowered speculators’ appetite for the sugar market,” said Rabobank.

London broker Marex Spectron flagged “a change of attitude towards unchanged fundamentals” in the sugar market.

“It goes without saying that the bullish story… of low stocks, rising consumption, production running close to maximum capacity and little sign of new investment…  is still basically intact and still persuasive,” the broker said.

“But that story has been around for a year now and bulls needed feeding” with more upbeat price news.

‘Substantial liquidation’

Still, hedge funds which too profits on long positions in the latest week, following the rebound of more than 70% in prices from a February low, may wish they had not, with futures recovering markedly in recent sessions.

The March contract on Monday touched 22.18 cents a pound, up nearly 5% since the CFTC data were taken, last Tuesday.

Nick Penney at Sucden Financial said that while there had been “substantial liquidation of speculative and fund longs,” dynamics remained “supportive” for prices.

“Whilst there is not any major fresh bullish news, the medium-term outlook is of tightness in the first half of 2017, bearing in mind the tail-off in the Brazil Centre South cane crop this season,” and expectations that the 2017-18 crushing season will suffer a delayed start.

‘Reason to hope’

By contrast, speculators raised their net long in arabica coffee to an eight-year high of 56,621 lots, close to the record figure of 58,370 lots set in February 2008, fuelling a surge in futures, which hit a fresh 22-month high on Monday.

Speculators’ net longs in Chicago grains, Nov 1 (change on week)

Soyoil: 126,543, (+12,389)

Soybeans: 110,613, (+12,008)

Soymeal: 21,021, (+6,533)

Kansas wheat: 4,084 (-1,321)

Corn: -65,008, (+3,954)

Chicago wheat: -110,632, (+12,755)

Sources: Agrimoney.com, CFTC

“Speculative market participants have sharply increased their net long positions in anticipation of further price rises,” said Commerzbank, flagging the support to futures from “the shortage of robusta coffee” , in Brazil, the top coffee-producing nation, weak exports and currency effects.

“The massive depreciation of the Brazilian currency – the real – had considerably increased profits in domestic currency, thus creating an incentive to export very high volumes, including from stocks” which are now “depleted”, Commerzbank said, if flagging better production prospects ahead.

“Blossoming is described as promising,” n Brazilian arabica-growing areas, meaning that “there is reason to hope that the next Arabica crop will be a good one, despite this being the lower-yield year of the two-year cycle”.

Record bullish

And in the grain and soy complex, hedge funds raised their net long for a fifth successive week, matching the longest bullish streak in positioning since early 2014, led by upbeat sentiment on prospects for soybeans and processing products.

Speculators’ net longs in Chicago livestock, Nov 1, (change on week)

Live cattle: 43,813, (+8,819)Lean hogs: 31,818, (+5,149)

Feeder cattle: -2,197, (+255)

Sources: Agrimoney.com, CFTC

In Chicago soybeans themselves, speculators raised their bet long back above 100,000 lots for the first time since August, helped by continued signs of strong demand for US exports, while in soyoil, the net long hit a record high of 126,543 lots.

Soyoil is being supported by firm prices of rival vegetable oil palm oil, of which key South East Asian production is proving disappointing.

‘Negative price implications’

Among the grains, hedge funds trimmed their net short in Chicago corn futures and options to a three-month low – a reduction which could create fresh scope for selling if the US Department of Agriculture, in its key Wasde report on Wednesday, issues a higher-than-expected estimate for the US yield.

Speculators’ net long in top 13 US-traded ags and (change on week)

Nov 1: 536,943 contracts, (+35,925 contracts)

Oct 25: 500,568, (+19,466)

Oct 18: 481,102, (+145,495)

Oct 11: 335,607, (+3,587)

Oct 4: 332,020, (+3,959)

Sources: CFTC, Agrimoney.com

While most analysts seen the corn yield estimate being cut in the Wasde, “a few though are now going against the grain and suggesting there might be a surprise upgrade,” said Tobin Gorey at Commonwealth Bank of Australia.

“The market has been trading with a ‘lower yields’ mindset over the last few weeks.”

With investors having raised long bets in corn, “any upgrade to US corn output this week would likely have quite negative price implications”.

In Chicago wheat, hedge funds cut their net short, but by a modest 12,755 lots, leaving it at a historically elevated 110,632 contracts.

“This position is big enough that additional short covering is not out of the question in Chicago wheat,” said broker Benson Quinn Commodities.

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