Hedge Funds’ Short-Covering Spree in Corn ‘May Have Further To Go’

(AgriMoney) – Hedge funds took – timely – profits on bets on corn and wheat price falls, but many threw in the towel too early on soft commodities, selling long bets on cocoa and sugar just before price rallies.

Managed money, a proxy for speculators, raised by a modest 6,450 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.

However, the small change in the net long – the extent to which long positions, which benefit when prices rise, outnumber short bets, which profit when values fall – disguised notable shifts in underlying strategy, and in particular a reversal of betting on grain price falls but rises in soft commodity values.

Indeed, the gap between speculators’ bullish bets on softs and bearish holdings in grains notably reversed, having hit an eight-month high early this month.

‘Market on edge’

The switch was driven in part by a scramble to cash in gains on short positions in grains, amid waning expectations for the US corn yield, amid a slow start to harvest and somewhat mixed reports from early cuts.

Indeed, hedge funds cut their net short position in Chicago corn futures and options for only the second time in 13 weeks.

“A wet US crop outlook has the market on edge and so investors were keen to buy back some short positions,” said Tobin Gorey at Commonwealth Bank of Australia.

The trend was echoed in Chicago wheat too, in which speculators had built a record net short at the start of September, encouraged by the ideas of huge world supplies of feed grain wheat, if not of higher quality supplies.

With wheat competing particularly strongly for a feed demand this year, prices of lower-protein, soft wheat, as traded in Chicago, are proving particularly influenced by those of corn, for which livestock feed is the major use worldwide.

‘Nearly under water’

And the short-covering wave in grains could continue, putting further upward pressure on prices, should the US harvest continue to fall short of lofty expectations, Water Street Solutions said.

Speculators “are still holding a huge short position” in corn, the ag advisory said, adding that for many funds, a further recovery in corn futures – up 7% so far this month for December delivery – would wipe out profits from this bet.

Many funds are close to “reaching ‘under water’ on their position”.

Futures on Monday were trading above 10-day, 20-day, 40-day and 50-day moving averages – implying most investors who have put on short bets of late are sitting on losses.

More short-covering could be in the offing, at a time of year when harvest usually sees prices fall, as supplies soar and investors can remove the last vestiges of risk premium from prices.

“The large short fund position, coupled with end-user demand and reluctant farmer selling, puts the market into a position that any disappointment relative to the huge crop expectations could set the market for a short-covering rally well before the typical ’30-50% harvest progress mark’,” Water Street Solutions said

Cocoa, sugar positions

By contrast, in New York-traded soft commodities, many hedge funds reduced a historically large net long position – but may wish they hadn’t given price recoveries since.

In cocoa, speculators cut their net long by more than 14,500 lots, the biggest sell-off in eight months, after Côte d’Ivoire’s state marketing board threatened to remarket up to 250,000 tonnes of exports, sending the December contract to a seven-month low last Monday.

However, futures have revived some 3% since that low, after Côte d’Ivoire officials lifted the threat.

Meanwhile in raw sugar, hedge funds trimmed their net long position ahead of a jump in futures on Friday to a four-year high, encouraged by a slowdown in Brazilian production, which has heightened fears of a supply squeeze.

“The forward curve from March 2017, which is in a pronounced state of backwardation, shows that it is rather the short-term outlook for the 2016017 season that is causing concern,” Commerzbank said.

Cattle bears caught out

In the livestock sector, managed money cut its net long in Chicago-traded futures and options to a four-month low of 57,099, as a cut in bullish bets on cattle outweighed more positive thinking on lean hogs.

However, funds may wish they had got the bets the other way round, with live cattle futures rebounding strongly since hitting a near-seven-year low two weeks ago.

The spot October live cattle contract has rebounded by more than 8% since, fuelled by a strong cash cattle market, seen in turn as reflecting buoyant margins for meat processors.

As of Friday, margins for beef packers were standing at $95.10 per head of cattle, up from $59.50 per head a week before, according to Hedgersedge.