Hedge funds cover ag shorts en masse – triggering hefty losses

March 21st, 2016

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Category: Grains, Oilseeds

CornSoybeanWheat450x299(Agrimoney) – Hedge funds threw in the towel on short positions in agricultural commodities at one of the fastest paces on record, in many cases realising losses – although ironically raising questions about market strength to come.

Managed money, a proxy for speculators, turned from a net short position in the main US-traded ags of 213,000 contracts – the second largest in history – to a net long of some 34,000 lots in week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.

This hefty swing bullish in positioning of 247,000 lots was the third biggest on records going back to 2006, and was fuelled by a cocktail of factors, besides a less downbeat view of investors towards commodities overall, a reassessment which has seen the CRB index rebound 8% so far this month.

Some ags have gained particular strength from factors such as a rebounding real, which boosts the dollar value of commodities such as coffee and sugar in which Brazil is particularly important, and concerns over US Plains dryness which have raised concerns over winter crops.

Shorts closed – at a cost

Indeed, hedge funds cut their net short in Kansas City-traded hard red winter wheat, the type grown in the US Plains, by more than 11,000 contracts, the biggest swing bullish for the contract in nearly six years.

In Chicago soft red winter wheat too, the speculator’s favourite, they cut their net short position heavily, by nearly 25,000 contracts.

Soybeans attracted a particularly dramatic wave of short covering, of nearly 65,000 contracts, driving managed money back into a net long – meaning that long positions, which benefit when prices rise, outnumber short bets, which profit when values fall.

However, this is likely to have meant swallowing losses on most recent soybean short positions, given that May futures, for instance, are trading above all major moving averages of less than 200 days – implying that most short bets taken out in the last six months are under water.

‘Larger world market deficit’

Similarly, among New York-traded soft commodities, sizeable short-covering sprees, encouraged by the stronger Brazilian real, in arabica coffee and sugar futures and options are likely to have hurt too.

For arabica coffee futures and options – in which hedge funds turned bullish at the biggest rate on record, to turn net long for the first time in seven months – prices for the May contract closed on Tuesday above all moving averages bar the 200-day.

In raw sugar, in which hedge funds drove their net long position back over 100,000 contracts, the May contract has reached prices not seen for a year.

Besides support from the real, sugar production “in Asia continued to disappoint, driving expectations for a larger world market deficit in 2015-16”, Rabobank said.

London broker Marex Spectron noted that “several analysts” have increased estimates for the world production shortfall in 2015-16, revisions which are “not entirely surprising since we have been seeing slight decreases in yields in, Cuba, Central America, north east Brazil, southern Africa, Thailand, China, Philippines.

“All of them are biggish producing areas,” the broker said, adding that most of the downgrades are “due to the tail end of El Nino”, which causes weather upsets in many sugar-growing areas.

‘Looks like a negative factor’

However, the extent of short-covering in some contracts curtailed ideas on further price support from short-covering – which has been a major cause itself of improved market sentiment.

Extreme holdings, short or long, tend to raise concerns that the position has become “crowded”, and prone to reversal.

In the soy complex, Benson Quinn Commodities, noting that “funds were the big buyers in soybeans, while adding a lot of length in soyoil” – in fact, making the second biggest bullish switch on record in the vegetable oil – said that “this position looks like a negative factor” for trading early this week.

Indeed, prices of both soybeans and soyoil showed, small, losses in early deals on Monday.

‘Speculators are very long’

For wheat too, Benson Quinn Commodities said that the net short positions “have become much more manageable.

“Unless the weather triggers some buying,” as indeed happened early on Monday, “the pared-down net short fund positions and weak technicals should offer resistance,” the broker said.

On sugar, Marex said that “the speculators are very long”, representing a reason for market caution.

However, history suggests that while “no one can foresee how long they will stay long… what little information we can gather from the past seems to show that we may have some way to go” before the position becomes so top heavy that significant selling is encouraged.

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