Managed money, a proxy for speculators, cut by more than 60,000 contracts its net long position in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.
The reduction in the net short – the extent to which short positions, which profit when prices fall, exceed long bets, which benefit when values gain – reflected in particular a round of short-covering in Chicago-traded soyoil after US energy officials proposed raising the mandate for blending biodiesel into transport diesel.
With biodiesel made largely from soyoil in the US, the proposal on May 29 to lift the target to 1.63bn gallons, from 1.0bn gallons, and above a previous suggestion of 1.28bn gallons, sent prices of the vegetable oil soaring on increased demand prospects.
‘Key ratio to fall’
Indeed, hedge funds hiked their net long in Chicago soyoil futures and options by 31,000 contracts during the week, the second largest bullish shift on records going back to 2006.
That took the net long to a four-year high of 59,630 lots.
With about 50% of biodiesel made from soyoil, “we find that an over 5% increase in soyoil use for industrial domestic consumption, in each of marketing years of 2015-16 and 2016-17, is needed to meet the proposed mandate levels of biodiesel”, Societe Generale said.
“We see the US soyoil stocks-to-use ratio,” a key measure of availability of commodity, and thus of the amount that buyers are likely to have to pay up for supplies, “falling below historically-average levels in those marketing years”, the bank added.
Dollar factor
However, short covering in other ags was, while widespread, more modest, leaving the overall managed money net short at 134,247 contracts, the fourth largest on record.
Hedge funds have been unusually comfortable this year with short positions on agricultural commodities, in part thanks to a generally rising dollar which, in cutting the affordability of dollar-denominated exports such as many ags, curtails demand and price prospects.
Furthermore, expectations for supplies of many ags have improved, with US grain inventories rebuilt after the 2012 drought, and a return of rains to central Brazil, after presistent dryness last year, boosting coffee and sugar output prospects for the world’s top producing country.
‘Wheat needs to work lower’
Still, wheat saw a fresh round of short-covering on revived concerns for the southern US Plains winter wheat crop, spurred by talk of disease, and with a lack of moisture in parts of the European Union and southern Russia also attracting attention.
In the week to last Tuesday, hedge funds cut their net short in Chicago wheat futures and options by 11,662 contracts, roughly reversing a more bullish shift in positioning the previous week.
At 71,763 lots, speculators had cut their net short position “to a more manageable position”, said Brian Henry at broker Benson Quinn Commodities, “though they still hold a healthy short.
Nonetheless, he flagged the potential for further selling in winter wheat assuming drier weather allows the US winter wheat harvest to ramp up, bringing extra supplies and suggesting the removal of the last weather premium.
“Adding better harvest progress is the final feature I would look to in my belief the wheat markets needs to work lower in the near term,” Mr Henry said.
Cattle in demand
Among New York-traded soft commodities, managed money trimmed its net long in raw sugar amid talk of rains to slow the harvest in Brazil’s key Centre South region, as well as some recovery in the real, which boosts the value in dollar terms of assets in which the country is a key player.
In arabica coffee, hedge funds reduced their net short from the 17-month high reached the previous week.
Meanwhile, in the livestock sector, managed money returned to increasing its net long in both Chicago lean hog and live cattle futures and options, after the passing Memorial Day holiday, which kicks off the barbecue supported demand expectations.
In live cattle, which have been trading at an unusually large discount to cash, the net long rose to a 2015 high of nearly 95,000 contracts.
