Hedge funds have undertaken a dramatic shift bearish in their positioning on agricultural commodities, building a record net short position in hard wheat, and selling down in cotton at a record rate.
Managed money, a proxy for speculators, hiked its net position in futures and options in the top 13 US-traded agricultural commodities by 176,017 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission shows.
The dramatic turn bearish in positioning drove the overall net short to 187,671 contracts – the second highest on records going back to 2006.
(The net short represents the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain.)
And it came not just amid a dire period for broad markets, with concerns over bank solvency adding to fears of slower economic growth which have spurred still-looser monetary policy in many countries, but bearish ideas on crop supply and demand too.
“Weak macros and rising US inventories” affected the market, Rabobank said.
Record bearish on hard wheat
Adding pressure to prices, the US Department of Agriculture in its much-watched Wasde crop supply and demand report last Tuesday raised estimates for US inventories of all of the main four crops – corn, cotton, soybeans and wheat – and lifted forecasts for world stocks of most of them too.
Extra stocks imply lower prices, in signalling that buyers face less pressure to pay up for supplies.Indeed, for wheat, the USDA hiked its estimate for world inventories of the grain at the close of 2015-16 by 6.8m tonnes to a record 238.9m tonnes, reflecting largely an upgrade to ideas on Chinese inventories, but also on US supplies.
And hedge funds in the week to Tuesday hiked their net short in Chicago soft red winter wheat futures and options by a historically large 32,000 contracts, while in Kansas City-traded hard red winter wheat speculators lifted their net short to a record 26,317 lots.
China stocks selldown?
In Chicago soybeans, hedge funds hiked their net short position by more than 42,000 contracts, the biggest week-on-week shift negative in positioning in more than three years, encouraged by upgrades to stocks estimates, but also by improved expectations for South American crops.
Brazil’s harvest has speeded up after a rain-delayed start – with data on Friday from institute Imea showing progress in top producing state Mato Grosso reaching 25.6%, only lagging 0.9 points behind the year-ago figure – while rainfall has eased dryness concerns in Argentina.
Meanwhile, in New York-traded cotton, hedge funds slashed their long position to the lowest in a year, thanks to a cut in the holding of 24,242 positions – the biggest on record.
At Texas A&M University, cotton marketing expert John Robinson, noting that futures in the fibre had “stair-stepped to new contract lows” last week, flagged the bearish influence of Wasde supply upgrades, and concerns over China releasing cotton from its huge stockpiles.
Last week “saw a few expressed expectations of Chinese reserve stocks entering circulation, perhaps even as exports”.
‘May support the market’
Other ags which bore the brunt of the managed money selling included sugar, in which they cut their net long by more than 17,000 contracts to the lowest in four months, even as prices showed some signs of stabilisation after a January decline.
Indeed, the extent of the reduction in the net long, of approaching 120,000 lots in three weeks, raised ideas that funds’ appetite for selling may be waning, a potential support for prices.
At Commonwealth Bank of Australia, Tobin Gorey termed the extent of the selldown a “surprise” which had undermined ideas of an “overly long” market which represented a “recipe for continued selling pressure”.
London broker Marex Spectron said that “in the very short term the lower net long… may support the market”.
‘Holding too many shorts’
There was some similar thinking in grain markets too, with Benson Quinn Commodities saying that hedge funds were “likely holding too many short positions,” noting also that futures had shown a “reluctance to push lower” despite the bearish push by speculators.
In wheat, the broker said it “would lean to the upside” based on the managed money positioning data alone, but underlined the “downside” to prices represented by ample world supplies.
In the livestock complex, hedge funds continued to warm to Chicago lean hog futures and options, raising their net long by nearly 1,800 contracts to a three-month high of 37,627 lots, although a revival in futures has shown signs of flattening off.
After an unexpectedly slow start to the year for US hog slaughter, and thus pork output, “hog weights have rebounded in the last couple of days and are heading higher,” Paragon Economics and Steiner Consulting said.
“As slaughter numbers normalise, the pork cutout [ie the wholesale carcass value] may once again come under pressure.”
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