(Agrimoney) – Have hedge funds been caught out by being overbearish on agricultural commodities?
On cotton, as on wheat and soybeans, late-comers to making short positions appear to be sitting on losses.
The extent of hedge funds’ negative sentiment towards cotton was unveiled by data from the Commodity Futures Trading Commission showing managed money, a proxy for speculators, undertaking a hefty sell-off in New York cotton futures and options in the last week of September.
Managed money turned net short £ meaning short holdings, which profit when values fall, exceed long bets, which benefit when prices gain £ by more than 8,000 contracts during the week – the most bearish positioning since November 2012.
‘Frankly surprised’
The sell-down reflected the concerns for Chinese demand from international markets following the country’s announcement that it was to limit its cotton import quota next year to 894,000 tonnes (4.1m bales), the minimum required by World Trade Organization commitments.
And it helped drive benchmark December futures to a close of 61.37 cents a pound on September 30, setting a contract closing low.
“I am, frankly, surprised that 61 cents a pound held with such an increase in hedge fund selling,” said Dr John Robinson, cotton marketing specialist at Texas A&M University, terming the bearish positioning by hedge funds during the week “really big”.
However, prices have recovered since to stand at 63.35 cents a pound in early deals in New York on Monday, helped by ideas that, with the quality of domestic cotton inventories in question, China will require anyway sizeable imports.
Rabobank on Friday estimated that China would buy-in 9.2m bales of cotton in 2014-15, saying that “we anticipate that high-quality international cotton will continue to be importers, albeit at a smaller pace, and bearing the 40% import tariff”.
‘Still very close to a record’
On wheat too, a rise in the speculative net short to a record high in Chicago as of September 23 has preceded some revival in prices £ in part thanks to the large negative positioning prompting hedge funds to reduce the bearishness of their bets.
Extreme positioning by hedge funds tends to raise doubts about the unfulfilled appetite for further such bets.
In the last week of September, hedge funds reduced their net short in Chicago wheat by 7,627 contracts, although, at more than 71,000 lots, it is “still very close to a record”, said Brian Henry at broker Benson Quinn Commodities.
Interestingly, the reduction in the net short was driven by rising numbers of long bets, on wheat prices rising, with short-covering relatively small.
In Chicago soybeans, in which prices have also been recovering this month, short covering rather than fresh longs were behind a reduction in the, unusually large, net short in the last week of last month.
Cocoa, sugar reversals
In New York-traded raw sugar, hedge funds also appear to have been wrong-footed by a market which, increasing their net short to an eight-month high of 51,789 contracts, even as futures recovered.
And they have, after a hiccup last week, extended their revival since, standing at 16.86 cents a pound in morning deals in New York, up 2.6% on the day.
Conversely, in cocoa, many speculators may have bought too late, with the net long in New York futures and options rising to 69,156 lots, a historically high if not unprecedented level, just ahead of a tumble in prices on improved West African production ideas.
Hedge funds have come off better in arabica coffee, lifting their net long to more than 39,000 contracts ahead of a rally which drove futures today to a two-year high.
Speculators overall raised their net long in the 13-main US-traded agricultural commodities by nearly 5,000 contracts although, at less than 250,000 lots, the position remains among the most bearish of 2014.
