Grain markets’ lurch lower catches hedge funds off guard

(Agrimoney) – The extent of the latest lurch lower in grain prices appears to have taken by surprise even hedge funds, which had cut their bearish bets on the complex – raising questions over whether fresh selling lies in wait.

Managed money, a proxy for speculators, raised its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by more than 113,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The increase in the net long – the extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall – reflected in part an increase of 27,375 contracts in the net long in New York-traded soft commodities, taking it a fresh record high of 418,209 lots.

However, it also reflected a cut in the net short position in the main grain contracts, including the soy complex, of 83,256 lots – the biggest bullish turn in positioning in grains in more than two months.

Many hedge funds may wish they had held their nerve with short bets, given the tumble in prices since last Tuesday of more than 5% in Chicago corn futures, to contract lows, while Chicago wheat has shed a further 7% to hit their weakest in 10 years.

‘Did not go well’

In fact, short-covering was relatively light in Chicago soft red winter wheat, with the net short cut by 1,761 contracts, with hedge funds focusing more on Kansas City-traded hard red winter wheat, in which they reduced their net long by more than 9,000 lots week on week.

The trend underlines the less bearish sentiment which surrounds prices of higher protein wheat supplies, as Agrimoney.com has highlighted, although Kansas City futures have also fallen heavily.

In Minneapolis-traded hard red spring wheat (not included in the overall grains data), hedge funds flipped to a net long position of some 3,000 lots, from a net short of 1,200 contracts a week before, a switch “which did not go well” given subsequent price moves, broker Benson Quin Commodities said.

In corn, speculators cut their net short position in Chicago corn futures and options for the first time in 10 weeks.

And in soybeans, they hiked their net long by more than 25,000 lots – the biggest bullish shift in positioning for three months.

‘Are funds short enough?’

The soybean move, in preceding a 5% drop in futures over the past week, has left hedge funds sitting on large losses in the oilseed.

With the best-traded November contract now sitting below its 200-day moving average, as well as those for lesser periods, that implies that all but the longest-term long bets are under water.

And with the prospect of record US soybean, and corn, harvests ahead, the positioning raised questions about whether further selling might be in the offing.

At Chicago broker RJ O’Brien, Richard Feltes flagged the autumn selling last year in corn and soybeans as “they were forced to liquidate as a large harvest unfolded”, bringing a seasonal surge in supplies, and with it swinging market power to buyers.

Hedge funds turned from net long in grains of nearly 475,000 contracts in late July to a net short of more than 226,000 lots four months later.

“Are funds short enough ahead of 2016 harvest?” Mr Feltes asked.

‘No place to begin getting bearish’

However, for wheat, Water Street Solutions flagged some hope of price revival, given that futures were already at their lowest since 2006.

“This is no place to begin getting bearish,” the ag advisory group said.

“With price being at decade lows, the odds of higher is beginning to outweigh the odds of lower.”

The latest leg lower in prices “could be the capitulation low trying to form”, Water Street Solutions said, with many observers believing prices in many markets, ironically, tend to revive just when the last bulls are giving up.

At Benson Quinn Commodities, Brian Henry said that managed money “may be leaning a touch too short Chicago, but I am not convinced”.

‘Sudden frost’

Among New York-traded soft commodities, the increase in the net long position to a record high was led, again, by raw sugar, in which they raised their net long to a fresh record high of 281,409 contracts, helping futures hold at among their highest levels in four years.

And in cocoa, managed money raised its net long by more than 12,000 lots – the biggest bullish shift in positioning, week on week, in the bean for nine years.

The upbeat sentiment on prices has been spurred by concerns over West African supplies, with arrivals from producers to ports in top producing country Ivory Coast at 1.453m tonnes so far in 2015-16 (which began in October), a drop of 15% year on year.

Speculators also returned to raising their net long position in New York-traded arabica coffee futures, for the first time in five weeks.

“The arabica [production] outlook for 2017-18 is overshadowed by concerns about weather conditions,” Commerzbank said, referring to Brazil, the top-ranked producer of the bean.

“A number of instances of sudden frost in recent months and cold weather could have reduced potential yields, though they can no longer do anything to harm the current crop.”