Column: Funds’ Soybean Optimism Reaches 16-Month Top on China, Smaller U.S. Crop

(Reuters) – Speculators have turned bullish on Chicago-traded soybeans for the first time since the trade war ramped up last year between the United States and China.

It appears progress has finally been made between the two countries in the trade talks, and at the same time, the U.S. soybean crop is stumbling and huge domestic supplies are set to shrink.

In the week ended Oct. 8, hedge funds and other money managers established a net long position in CBOT soybean futures and options of 6,501 contracts, according to data from the U.S. Commodity Futures Trading Commission.

That compares with a net short of 8,730 contracts in the previous week, and the new soybean stance is funds’ most bullish since early June 2018.

They are even more optimistic heading into the new week. Trade estimates suggest that commodity funds bought about 24,500 soybean futures contracts between Wednesday and Friday.

The major buying surge came on Friday amid positive cues from the ongoing trade talks between U.S. and Chinese officials. CBOT soybean futures topped out at $9.39-1/4 per bushel on Friday, the highest level on a continuous chart since June 13, 2018.

After the close on Friday, the two sides agreed to the first phase of a deal to end the trade war, and this was said to include some substantial U.S. agricultural purchases by China, though additional details were not immediately offered.

It was probably helpful that a day earlier, the U.S. Department of Agriculture cut the domestic soybean harvest to a six-year low. Ending stocks for the 2019-20 marketing year were slashed to 460 million bushels, which if realized would be a 50% reduction on the year.

But soybean futures ended the day lower on Thursday despite the supportive government outlook. One thing that market participants should keep in mind is that funds are finally bullish soybeans for the first time in 16 months, and they no longer have massive shorts to cover. That could be a limiting factor for upward price movement from here.

Money managers also extended their bullish bets in CBOT soybean oil futures and options through Oct. 8 to 29,723 contracts from 11,473 in the previous week. That is funds’ most optimistic view on the vegoil since February.

They also reduced their net short in CBOT soybean meal futures and options to 32,740 contracts from 39,557 a week earlier. Commodity funds were likely net buyers of soybean meal and net sellers of soybean oil over the last three sessions.

BEARISH GRAIN VIEWS REMAIN

In the week ended Oct. 8, money managers cut their net short position in CBOT corn futures and options to 90,668 contracts from 126,174 a week prior. However, funds were predicted to have been light sellers of the yellow grain between Wednesday and Friday.

Corn futures plunged on Thursday as USDA reduced the U.S. corn crop to a smaller degree than what the trade expected, and year-end inventory came in much heavier as a result. The agency placed 2019-20 U.S. corn ending stocks at 1.929 billion bushels, which would be down nearly 9% on the year.

Those losses were erased on Friday with the U.S.-China trade optimism. December corn futures rose 4.6%, the contract’s largest single-day percentage gain on record.

CBOT December wheat also surged 3% on Friday, its biggest one-day gain in three months. But funds were pegged as light sellers of Chicago wheat futures over the last three sessions.

Through Oct. 8, money managers had trimmed their net short in CBOT wheat futures and options to 19,138 contracts from 21,514 a week earlier. They also trimmed bearish views in Minneapolis wheat futures and options to 11,777 contracts from 12,445.

But funds remain firmly pessimistic in Kansas City wheat. They expanded their net short to 35,076 futures and options contracts from 32,780 a week before. Speculators have not been bullish in hard red winter wheat since December.

Although there are some concerns with poor weather for growing wheat, especially in the Southern Hemisphere, world wheat supply remains ample. USDA sees 2019-20 global ending stocks up 3.6% from the previous year, including a 3% rise in supply outside of stockpiler China.