(Agrimoney) – Hedge funds were punished for their revived optimism over agricultural commodity derivatives – raising their bullish positioning to a one-year high just as prices were heading for a setback.
Managed money, a proxy for speculators, raised by more than 75,000 contracts its net long holding in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.
The fourth successive week of enhanced bullish positioning, the longest such streak in 2015, drove the overall net long to 569,279 contracts, the highest since July last year.
The net long is the extent to which long positions, which benefit when prices rise, outnumber short bets, which profit when values fall.
However, hedge funds made their bullish call even as ag markets were preparing for a poor finish to last week, with Chicago wheat futures, for instance, losing 3.0% in the Wednesday-Friday sessions, while New York raw sugar tumbled more than 5%.
Dollar strength
The late-week price declines reflected in part a revival in the dollar, which posted its strongest week since May against a basket of currencies, encouraged by strong US inflation and housing data which spurred ideas of a rise in the country’s interest rate by the end of the year.
A strong greenback undermines values of dollar-denominated exports, such as many agricultural commodities, by making them less affordable to buyers in other currencies.
However, the market reversal was also attributed to reduced concerns over supplies of ags such as corn and soybeans, amid improved Midwest weather.
‘Correction is warranted’
Indeed, ironically, the extent of hedge funds’ more upbeat positioning on agricultural commodities provoked ideas that more selling may be in the offing, in creating something of an overhang of bullish holdings.
“The structure of the market leans negative as the funds over the last month have squared short positions and in some cases are now holding considerable length,” said Nicholas Sax at Minneapolis-based broker Benson Quinn Commodities.
“Considering their contributions along with stabilising [US row crop] conditions I would argue a correction is warranted.”
US Department of Agriculture data later on Monday are expected to show at least a stabilisation, and potentially improvement, in the condition of US corn and soybean crops.
“With improving weather conditions yield prospects may start to improve,” broker CHS Hedging said.
“Even if Monday’s crop condition report does not show improvement, it should the following week if the forecast is correct into the end of July.”
Wasde boost
In Chicago-traded corn futures and options, hedge funds had, as of last Tuesday, raised their net long position above 200,000 contracts for the first time in six months.
The increased bullishness was encouraged by enhanced ideas over consumption of US supplies, as outlined in the USDA’s July 10 Wasde crop report, and amid ideas, at the time, that downgrades to the official yield forecast was in the offing.
Similarly, in soybeans, hedge funds raised their net long in Chicago futures and options to a 13-month high of 85,104 lots, also amid improved US demand estimates and fears for this year’s yield.
That represented a seventh successive week of increased bullish positioning on soybeans, the longest such streak since early 2012.
‘Very bullish report expected, but…’
Among soft commodities, hedge funds were caught out in particular in raw sugar, in which they turned net long for the first time in five months – only for prices to retreat, encouraged by a large delivery of white sugar to ED&F Man on the expiry on Thursday of London’s August white sugar contract.
A large overhang of Thai sugar is also seen as weighing on near-term prices, and preventing futures reacting to some weather setbacks in Brazil, the top producer and exporter of the sweetener.
Data this week from cane industry group Unica is expected to show the loss to rains of some five days of production in the first half of this month in Brazil’s key Centre South region.
“A very bullish report is expected, but we wonder if it has already been taken into account and whether the more benign conditions expected in the second half [of July] will compensate,” said Nick Penney, senior trader at Sucden Financial.
‘Price will fall’
Meanwhile, in New York cocoa, hedge funds raised their net long to a six-month high, only for prices to ease back later last week on soft North American processing data for the April-to-June quarter, when the region’s grind fell to a two-year low of 120,359 tonnes.
That followed data for Europe showing a small rise, of 0.6% year on year, to 309,677 tonnes.
Capital Economics viewed the data as pointing to subdued demand, saying that “combined with a rebound in Ghanaian production, we think that the price of cocoa will fall this year”.
