Extent of Hedge Funds’ Grain Buying Rings Alarm Bells, but in Softs…

March 19th, 2018


Category: Cocoa, Sugar

(Agrimoney) –  Concerns grew over the extent of hedge fund buying in grains, even as selling in coffee and sugar prompted Societe Generale to caution over the potential for a short-covering wave in the soft commodities.

Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities by 38,802 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The buying took the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 549,437 contracts, the largest in a year.

It also represented a seventh successive week of net buying, matching the longest such streak in four years.

‘Room for technical corrections’

However, the data underlined a marked disparity in funds’ betting on grains and on New York-traded soft commodities.

In grains, including the soybean complex, hedge funds lifted their net long to a 21-month high of 524,853 contracts, proving net buyers for an eighth successive week, so matching the longest such shift in 11 years.

The buying provoked ideas that grains may be primed for price falls, with hedge funds having fulfilled much of their appetite for buying, and with long bets left looking “crowded”.

Analysis group Agritel said that “the funds are now long for all products”, with Chicago wheat a notable exception, “which leaves room for technical corrections on profit taking”.

Benson Quinn Commodities, said that “if the fund position had become a negative influence in these markets, this report didn’t do anything to change that”.

‘Incredible move’

The increase in the net long in Kansas City hard red winter wheat to a seven-month high of 28,946 contracts attracted attention, coming as hopes are rising for rains for the US southern Plains, and an easing in the dryness worries which have spurred wheat buying.

However, growth in net longs in corn and soybeans to the highest in 21 months also raised alarm bells among many investors, being terms for instance by Richard Feltes at RJ O’Brien as “larger than expected”.

Benson Quinn Commodities said that investors had expected that the CFTC data “would show funds liquidating length in soybeans”.

And the broker added that in corn, it “would have more confidence” in futures finding support at Friday’s closing levels,” if the funds hadn’t bought as much as they did through Tuesday”.

Terry Reilly at Futures International described as an “incredible move” the extent of buying in Chicago corn, in which hedge funds raised their gross long position in Chicago futures and options above 380,000 lots for the first time in seven years.

‘Extremely vulnerable to short-covering’

By contrast, in soft commodities, managed money raised its net short position to 74,837 lots, led by an increase in the net short on raw sugar to 141,659 lots, the second largest such holding on records going back to 2006.

The selling followed an upgrade to a record 29.5m tonnes by the Indian Sugar Mills Association in its forecast for Indian output this season, “up 13% year on year, while exports could reach a potential 2m tonnes”, Rabobank noted.

However, the extent of the net short position, “combined with the weakness in prices, has made Ice sugar extremely vulnerable to short-covering”, Societe Generale said, restating a rating on arabica coffee too as “oversold” and “vulnerable to short-covering”.

Hedge funds rebuilt their net short in arabica coffee futures and options to 56,884 lots, within 1,000 contracts of a record high, with the gross short of 91,442 lots indeed the largest on data going back to 2006.

‘Funds to sell aggressively’

Still, Marex Spectron cautioned that technical analysis suggested further selling in sugar to come, saying that “we should see system funds aggressively sell now” in the nearest-but-one contract, July, which indeed stood 1.1% lower at 12.71 cents a pound in early deals on Monday.

The spot May contract stood down 1.1% at 12.52 cents a pound, with Marex cautioning that “should we break through support at 12.45-12.53 cents a pound, then the target will be the August 2015 low of 10.13”.

The London-based merchant added that “the shorts are relatively stronger than the longs, since time is running out for the producers, whereas the wide contango (carry) formation of the market will pay the funds to stay short.

“When will it end? Once the producers have caught up with their selling… Once they have sold, there will be no one left to sell.”

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