Hedge funds cut bullish bets on ags to second lowest on record

March 16th, 2015

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Category: Grains, Oilseeds

Sugar-Beet450x299(Agrimoney) – Hedge funds cut their bets on rising agricultural commodity prices to the second lowest on record, thanks to more bearish takes on grains and soybeans, and a record net short position in sugar.

Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by nearly 84,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The reduction took the overall net long to 49,700 contracts, the second lowest on data going back to 2006.

The most bearish positioning was seen in mid-August 2013, when hedge funds ran up a small net short position – meaning that short holdings, which profit when values fall, exceeded long bets, which benefit when prices gain – of 2,686 contracts.

Extreme positions

The selldown to August 2013 – amid optimism over US corn and soybean crops, and ideas of large Brazilian coffee inventories – preceded a sharp recovery in buying in ags.

Over the following three weeks, managed money rebuilt a net long position of nearly 300,000 contracts.

Extreme net short, or net long, holdings tend to raise concerns over the extent of further appetite for such bets, raising the potential for large swing-backs in prices if the market sees a reason to cover positions.

Record bearish on sugar

However, hedge funds have illustrated, in raw sugar, their willingness to extend bearish positions into record territory with the support of compelling enough reasons to expect lower prices.

In the week to last Tuesday, managed money extended its net short in New York-traded raw sugar futures and options by 5,723 lots to top 100,000 contracts for the first time on records going back to 2006.

The selling in raw sugar futures – which on Friday hit 12.57 cents a pound in New York, the lowest since April 2009 – has been spurred largely by weakness in the Brazilian real, which reduces the value in dollar terms of assets in which the South American country is a major force.

“At R$3.25 to the dollar, the real finds itself at an 11-year low against the US currency,” Commerzbank said, adding that “our currency strategists expect the real to remain weak on the back of poor macroeconomic fundamentals, the complicated political situation and social unrest.

“This means that Brazilian suppliers can sell their products at lower dollar prices without suffering any losses in their own currency.”

The bank added that “the news from the fundamental side has also been bearish” too, noting comments from the Indian Sugar Mills Association that “sugar production in India could outstrip demand by 3m tonnes next season and thus give rise to export potential again”.

‘Significant risk to the downside’

In the latest week, the weakness in the real also prompted hedge funds to extended their net short position in arabica coffee, to a 13-month high of 4,278 contracts.

Brazil is the largest producer and exporter of arabica coffee, as it is of raw sugar.

In soybeans, another agricultural commodity in which Brazil is a large exporter, speculators returned to a net short in Chicago-traded futures and options, of 17,414 contracts – although this remains below levels close to 40,000 lots seen last month and in September which preceded a buying wave.

Soybean prices are also being undermined by ideas of large US sowings this spring, while the newly-started Argentine harvest and Brazilian harvest now some half-way through are ensuring ample short-term supplies.

“Considering that the upcoming US Department of Agriculture planting intentions report that should show an increase in US soybean acres, and the soybean market still carries significant risk to the downside from this level,” one US broker said.

Negative on grains

Hedge funds also sold heavily in Chicago-traded grains, cutting their net long in Chicago corn to a one-year low of 32,660 contracts, despite a much-watched US Wasde crop report on March 10 which showed smaller estimates for domestic and foreign inventories than investors had expected.

And in soft red winter wheat, the managed money net short as of last Tuesday grew to 67,411 contracts, within sight of the record high of 78,928 lots set in September, although there are ideas that dry US weather prompted speculators to close some of these of these short positions later last week.

Indeed, for Kansas City-traded hard red winter wheat, managed money rebuilt a net long position of 5,270 contracts in the week to last Tuesday, having in the previous week reduced it to a 19-month low.

Dryness concerns are building in particular over the southern US Plains, the main hard red winter wheat-growing area.

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