Hedge funds, while becoming more upbeat on price prospects for most ags, turned so bearish on wheat that they have left the market open to a short-covering fuelled uptick in prices – and indeed have already been caught out by a late-week recovery.
Managed money, a proxy for speculators, raised its net long position in futures and options in the top 13 US-traded agricultural commodities by more than 50,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator
The increase took the net long holding – the extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall – to 71,379 contracts, representing a further recovery from the unusually-low figure of 8,242 reached in mid-November.
The revival was reflected in position in all three major ag sectors – soft commodities, livestock and grains, with the net short in the latter reduced for the first time in seven weeks.
Big shift bearish
However, the recovery in sentiment was not reflected in bets on Chicago soft red winter wheat futures and options, in which hedge funds expanded their net short holding by nearly 30,000 lots.
That was the biggest bearish shift in positioning in two years.
The move – fuelled by rain relief for dryness-pressed winter wheat seedlings in the US and parts of the former Soviet Union, and by a large number of deliveries against Chicago’s expiring December contract – took the net short to a historically-large 77,324 lots.
And this at a time when speculators retained a near-record net short in Kansas City hard red winter wheat futures and options, of some 24,000 contracts.
‘Bottoming price action’
In Chicago, “managed money has only pushed their position size past 80,000 contracts on one occasion, last spring, when it reached 110,000 lots,” said Jonathan Watters at broker Benson Quinn Commodities.
The extent of the net short may have set the scene for a recovery in prices – with historically large positioning raising ideas that appetite for this bet may be spent, and a reversal in the offing.
“There is no fundamental reason for wheat to rally, but in the past similar instances of speculator selling have led to bottoming price action,” Mr Watters said.
“I wouldn’t be shocked to see more short covering” ahead of Wednesday’s released by the US Department of Agriculture of its monthly Wasde world crop supply and demand report.
In the money
Already, Chicago wheat futures for March, the best-traded contract, have recovered some 3% since Tuesday’s close, leaving out of pocket investors who have taken out short positions in the past week.
However, hedge funds fared better in extending their net long in New York-traded cotton futures and options by a sizeable 17,717 contracts over the week, with prices up more than 3% so far this month.
“The hedge fund longs added a lot, while the hedge fund shorts liquidated a lot,” said John Robinson, cotton marketing expert at Texas A&M University.
Cotton prices have been supported both by US rains which have raised concerns over the quality of late-harvested crop, and by bumper US export sales, which for upland cotton set a weekly 2015-16 high of 287,100 running bales, data on Thursday showed.
‘Much stronger exports needed’
Hedge funds also look in the money on Chicago soyoil futures and options, in which they raised their net long y 19,003 lots, the most since February, after the Environmental Protection Agency raised the mandated US use of biodiesel, which is made from vegetable oils.
Positive sentiment on the vegetable oil, also attributed to rising prices in Argentina, the top soyoil exporter, and to fears that El Nino will curb output of rival palm oil, have sent March futures up 9% so far this month.
And legislation being discussed in the US – which would switch a biodiesel tax credit from blenders to producers, so avoiding imported biofuel being eligible – is being viewed as supportive for soyoil prices too.
‘Fully supplied’
In the livestock sector, however, an increase in the net long position in Chicago lean hogs, for the first time in six weeks, may have come too soon, with futures seeing fresh losss since.
“The pork cutout,” that is the wholesale value of packed meat, “continues to be under pressure as large pork supplies hit the market”, said Paragon Economics and Steiner Consulting, noting a year-on-year rise of 6% in US pork output in recent weeks.
“For the moment, it appears that retail markets are fully supplied with pork.”
“Much stronger exports are needed in the January-to-March quarter of 2016 to help absorb the expected large pork volume.”
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