(Agrimoney) – The extent of the deterioration in hedge fund sentiment on grains, fuelled by US data last week, was laid bare in a report which showed a hefty retreat in speculators’ bullish bets on the complex, particularly in soybeans.
Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by nearly 50,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.
The reduction in the net long – extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall – was led by a sell down in soybeans, after the US Department of Agriculture on January 12 surprised investors by failing to cut its estimate for domestic stocks of the oilseed at the close of 2014-15.
Instead, the USDA balanced out an increase to its forecast for US soybean exports over the season, which ends in August, with an upgrade to the estimate for last year’s domestic harvest.
Soybean sell-off
The USDA estimates prompted a drop of 5% in Chicago soybean futures prices in the week to last Tuesday.
And the CFTC data revealed the role of hedge funds in fuelling this decline, with the managed money net long in soybean futures and options tumbling by more than 28,000 contracts during the week – the biggest bearish swing in positioning in the oilseed in seven months.
In Chicago corn, hedge funds also cut their net long significantly – by more than 22,000 lots, the biggest selldown in nearly six months – despite the January 12 USDA reports appearing less downbeat for the grain, in cutting the estimate for US season-end inventories by more than investors expected.
However, this forecast assumed an elevated estimate for production of ethanol (made mainly in the US from corn) over which many investors have doubts, given the drop in oil prices.
Rabobank, for instance, has said it “questions” the USDA’s assumption, saying that “ethanol margins have turned negative with the low crude oil price”, although the other banks, such as Morgan Stanley, have taken a more upbeat view.
Longer-term implications
In wheat too, hedge funds swung bearish in their positioning – albeit by a relatively small 4,712 Chicago contracts, cutting their net long back below 10,000 lots – fuelling a drop in future prices of more than 7% over the week.
Price falls at this time of year have an extra dimension, in that it is values early in the calendar year that the USDA uses to calculate some crop insurance payout levels, which are in turn viewed as having some impact on farmers’ spring planting decisions.
In cotton, for instance, John Robinson, cotton marketing specialist at Texas A&M University, flagged the impact of funds failing, as last winter, to hike their long positions in the fibre and underpin price rises.
Dr Robinson, noting that the managed money position had been “swinging back and forth since October between net short and barely net long” said that “the most important thing in all this has been the absence of a big ‘Christmas rally’ in cotton futures, typically associated with fund buying.
“In past years those Christmas rallies have helped growers by providing higher prices during the crop insurance price discovery period.
“Unfortunately, that is not happening this year.”
Lean hog selldown
Hedge funds actually cut their net long in New York cotton futures and options by a modest 1,024 lots during the latest week.
However, overall, speculators’ lean bearish in positioning on grains was not matched in soft commodities, with concerns of Brazilian weather spurring an increased in the managed money net long rising in arabica coffee, and a large cut, of more than 11,000 lots, in the net short in raw sugar.
Hedge funds’ net short, nonetheless, remains historically large, at nearly 50,000 contracts, and many investors believe that a return in raw sugar prices above 15 cents a pound late last week was spurred by a further wave of short-covering.
In the livestock complex, managed money retained its more bearish trend in positioning, especially in Chicago lean hogs, in which it cut its net long for a sixth successive week, this time to 20-month low of 33,653 contracts.
Sentiment in lean hog futures has been dented by expectations of US herd expansion, with the country appearing to have under control its outbreak of porcine epidemic diahorrea virus (PEDv).
