Hedge funds favour grains to soft commodities – but will it last?

Hedge funds, despite lifting bullish bets on cotton to a three-year, favoured grains to soft commodities – so much so that many investors saw scope for fresh selling in the likes of corn.

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 55,896 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The rise in the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – reflected improved sentiment towards grains and livestock contracts.

In futures and options in New York-traded soft commodities, hedge funds cut their net long for a fourth successive week, the longest declining streak in nine months.

‘Too much selling too quickly?’

In New York cocoa, managed money cut its net long to 4,266 contracts, the lowest level in four years, harmed by a pick-up in deliveries from farms to ports in Ivory Coast, the top producing country, where rains have supported future harvest prospects too.

Speculators’ net longs in Chicago grains, Nov 22 (change on week)Soybeans: 113,644, (+15,467)

Soyoil: 95,533, (-2,108)

Soymeal: 19,377, (+5,373)

Kansas wheat: 10,905 (+8,924)

Corn: -60,394, (+24,762)

Chicago wheat: -114,222, (+18,131)

Sources: Agrimoney.com, CFTC

Hedge funds cut their net long in arabica coffee too, amid talk of profit-taking which has dragged futures, as of Tuesday, some 14% below near-two-year highs set three weeks ago.

However, the biggest decline in bullish positioning was in raw sugar, in which hedge funds slashed their net long position by nearly 41,000 contracts, the biggest selldown since February, and larger than many investors, such as Sucden Financial, had expected.

“The bulls will tell you it’s too much selling too quickly,” Sucden said, while underling to “the bearish argument that it’s only the start of the fund unwind of the long that was on since pretty much Easter”.

Hedge funds have now cut their net long in raw sugar by more than 100,000 contracts from the record high of 285,488 lots reached in August.

‘Priced out’

The selldowns overshadowed a hike in the net long in New York cotton futures and options of 18,714 lots, the biggest bullish swing in positioning in 14 months.

Speculators’ net longs in New York softs, Nov 22 (change on week)

Raw sugar: 176,851, (-40,915)

Cotton: 80,553, (+18,714)

Arabica coffee: 50,722, (-2,150)

Cocoa: 4,266, (-4,486)

Sources: Agrimoney.com, CFTC

The spree took the net long in cotton to 80,553 contracts – the highest in six years.

Since September, the [cotton] price has resumed its upswing thanks to the prospect of a second year of deficit in a row,” Commerzbank said.

However, at Commonwealth Bank of Australia, Tobin Gorey raised doubts as to whether prices could maintain their gains, after so much buying pressure has already been spent.

“The market will start today testing key resistance levels,” Mr Gorey said, adding that “synthetic alternatives remain much cheaper.

“So any forays [in New York cotton futures] above 72 cents a pound have been short-lived as cotton starts to find itself priced out of the production mix.”

‘Plenty of room to add to a short’

Investors pondered whether a swing bullish in grains and soybeans was sustainable too, after the CFTC data showed notable reductions in net short positions in Chicago-traded corn and wheat futures and options.

Speculators’ net longs in Chicago livestock, Nov 22, (change on week)

Live cattle: 31,931, (-2,024)

Lean hogs: 58,059, (+14,182)

Feeder cattle: 2,685, (+2,026)

Sources: Agrimoney.com, CFTC

In corn, this move “leaves plenty of room to add to a short position”, said Benson Quinn Commodities, adding that it would “be neutral to bearish” on corn short-term after the data.

In soybeans, in which hedge funds raised their net long by 15,467 lots, the most in five months, the market “is now becoming overbought and… appears vulnerable to a correction”, the broker added, albeit adding that commercial buyers appear to have driven the rise in prices to the four-month high set in the last session.

“Some of the Chinese pricing is said to be traditional pricing as vessels get loaded, yet some buying could be new buying tied to balance of trade issues that could arise from new US presidential administration,” the broker said.

‘Diverging direction’

Meanwhile, in wheat, managed money cut its net short in Chicago soft red winter wheat, but more remarkably hiked their net long in Kansas City-traded hard red winter wheat by 8,924 contracts to 10,905 lots.

That represented the biggest net long position in 21 months, and comes amid what CBA’s Tobin Gorey termed “separate lives” between Chicago and Kansas City market.

While the US hard red winter wheat market faces the bigger “problem” of large supplies, it “is slowly being resolved” through, for example, improved US exprots.

Chicago-traded soft red winter, by contrast, “is a small problem that is not being resolved, slowly or otherwise”.

This contrast in supply fundamentals “becoming more pronounced and this seems to finding its way in the diverging direction, respectively, of Kansas and Chicago futures prices”.

The premium of Kansas City wheat futures for December to Chicago futures for December soared from a low of $0.03 ¼ a bushel early last week to stand at more than $0.20 a bushel in Tuesday’s trade.


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