Hedge funds defied expectations of many investors and lifted their net short position in US-traded ags to the highest on record – although in a move which is leaving many late movers looking at losses.
Managed money, a proxy for speculators, raised by nearly 8,000 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 increase in the net short – the extent to which short positions, which benefit when prices fall, outnumber long bets, which profit when values rise – was small by historical perspectives, and compared with, for example, a 176,017-contract swing the week before.
However, it was sufficient to lift the net short in US-traded ags to 196,624 contracts – the highest on records going back to 2006.
‘Slightly surprising’
The increasingly bearish take was unexpected by observers in some markets, given that historically high, or low, net fund bets tend to encourage a reversal in holdings, for fear that the position has become “crowded” and prone to prompting a sharp snap back in prices.
In Chicago corn, for instance, in which hedge funds hiked their net long by more than 35,000 contracts in the latest week, Benson Quinn Commodities termed the move “slightly surprising”.
Terry Reilly at Futures International said that corn future may trade higher early on Monday “based on the surprise” change in fund holdings and, indeed corn futures for March stood up 0.8% at $3.68 ½ a bushel in early deals.
The contract is now back above 10-day, 20-day, 40-day and 50-day moving averages, implying that most investors who took out short positions in recent weeks are out of the money.
‘Notable support for prices’
In New York-traded cotton too, Louis Rose at the Rose flagged the potential for futures to find support in data showing hedge funds had returned to a net short in the fibre for the first time in more than a year.
“Adjustments for the week ending February 16 were accomplished at a volume weighted average price just above 59.00 cents a pound, and this level will likely offer notable support for the May contract this week,” Mr Rose said.
In fact, the contract gained 0.9% to 60.05 cents a pound in early deals on Monday, leaving recent short bets out of the money.
However, Mr Rose also voiced market doubts about how much further the contract can rally.
“Merchants and analysts who have recent voiced expectations of May futures to approach the 65.00 cents-a-pound mark are now acknowledging that the current poor macroeconomic climate may restrict any rallies to the 63.00–64.00 range,” he said.
Prices of cotton, as an industrial commodity, tend to be more prone to economic worries than those of food crops.
‘Top in the market?’
By contrast, Benson Quinn Commodities flagged a negative pressure on soybean prices that could emerge from a sharp short-covering wave, of nearly 25,000 lots, in the latest week.
The broker estimated that a rally in prices late last week “had funds covering another 40,000 to 50,000 contracts”.
“Without fresh fundamentals news on Monday, I would suspect this puts a top in the soy market,” the broker said, foreseeing the outlook for trading this week is “choppy lower as the market positions ahead of first notice next Friday”.
Also in Chicago, hedge funds extended their net short in wheat by more than 3,000 lots to a historically high, although not unprecedented, 84,000 contracts.
However, in Kansas City-traded hard red winter wheat futures and options, the managed money net short was curtailed a little, by some 2,300 contracts, to a little under 24,000 lots, the second highest on record.
Concerns over dryness in the US Plains has improved sentiment somewhat in the hard red winter wheat market.
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