Hedge fund short-closing wave spurs fears for corn

October 27th, 2014

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Category: Grains, Oilseeds

Beans_Corn_Soy_Lentils450x2(Agrimoney) – Hedge funds, while taking a more negative take on soft commodities, extended their short covering in grains so much that, in corn, they were seen as having potentially opened the door for a fresh selling wave.

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 45,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The more positive take took the net long position – the extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall – to just short of 350,000 contracts, a three-month high.

Hedge funds have now raised their net long by more than 100,000 contracts from a low set in late September.

October price recovery

The change has been down nearly all to the covering of short positions, which have reduced by more than 110,000 contracts in four weeks, compared with a drop of less than 6,000 lots in the number of long bets.

In the latest week, the short-covering was particularly notable – again – in grains, as a rising market wrong-footed hedge funds which, until this month, had reaped large profits from betting on falling prices, as estimates for the US corn and soybean harvests increased.

This month’s recovery in prices has been attributed to a tardy harvest, which has slowed farmer selling, at a time of decent demand – besides to the general market liquidation which, while negative for share prices, has been positive for ags, as hedge funds have closed some of their plethora of short holdings.

The more bullish futures chart signals spurred by price rises have only encouraged more short-selling.

‘Look for lower trade’

However, this trend may be coming to an end, at least for corn, given the extent of short positions which hedge funds have already closed.

The rise of more than 38,000 lots in the managed money net long in Chicago corn futures and options was the biggest positive switch in seven months, took the net long above 126,000 contracts, nearly twice its level at a low two months ago.

With hedge funds believed to have closed further short positions since Tuesday, the extent of the shift raised questions over whether the appetite for position-covering had been largely spent.

Brian Henry at Benson Quinn Commodities said that the net long position “is high given the size of the crop”, with the US corn harvest expected to set a record by a distance.

“I’d view this as a negative [for prices] going forward. With better harvest progress, weakening technicals and a soybean market the trade may have their arms around I’d look for lower trade to continue into next week.”

Less negative on wheat

Hedge funds’ more positive stance on grains saw them cut their net short in Chicago soft red winter wheat by more than 9,000 contracts although to a still-relatively-downbeat level of 51,000 lots.

In Kansas City hard red winter wheat, the managed money net long rose by 5,437 lots, the biggest positive shift in positioning in seven months.

Besides the broadly improved market sentiment, wheat has benefited too from concerns over a poor start to the growth season for Russia’s autumn-sown seedlings, whose development has been slowed by a lack of rainfall, and with cold temperatures having arrived.

In Chicago soybeans, a small reduction in the net short reflected cuts in both bets on price rises and price falls.

The gross long position, at 97,190 lots, actually fell to its lowest since January 2012.

Downbeat on softs

However, in soft commodities, hedge funds took a slightly more negative stance, encouraged, in arabica coffee, by Brazilian rains which have raised hopes that the country’s 2015 production of the variety may not prove as poor as had been expected, with some forecasts having slipped well below 25m bags.

In cocoa, signs of stabilisation in the Ebola threat to West Africa, the top producing region, besides weak Malaysian grind data, down 13.7% for the July-to-October quarter, encouraged a reduction in the net long below 50,000 lots for the first time in five months.

And in cotton, poor weekly US export sales data, which fell below 7,000 running bales, encouraged an end to a trend of taking a more positive position on New York-traded futures and options.

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