(Agrimoney) – Hedge funds extended to the longest this year a spree of bullish positioning in farm commodities, although amid ideas that the shift may be down to end-of-year position closing rather than real expectations of price rises.
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 21,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.
That represented a fourth successive week of an increased net long – the extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall – matching the most sustained period of bullish positioning since October-November last year.
‘Redemption-based buying’
However, the data came some suspicions that short-covering, and upward pressure on prices, is being spurred by the looming end of 2015 rather than recovery in underlying sentiment on the sector.
Besides spurring simple year-end profit-taking and portfolio tidy-ups, the prospect of holidays – and days without being able to trade, besides weakened liquidity when markets are open – tends to encourage many investors to close positions.
Tregg Cronin at Halo Commodity Company, noting that “managed funds remain heavily short” in grains, and “given the proximity to year end”, mulled that “redemption-based” buying was likely behind some recent price support.
Ideas of position closing were also encouraged by data on open interest – the number of live contracts – which for all investors fell to 1.34m contracts, down by more than 45,000 lots week on week, and well below the 1.48m contracts recorded a month before.
Only in cattle, the soy complex and, marginally, in coffee did open interest rise.
‘Very manageable’
In Chicago soft red winter wheat, in which open interest fell by nearly 15,000 contracts, hedge funds cut their net short position by nearly 22,000 lots, nearly all accounted for by a cut in short holdings rather than by increased long bets.
In hard red winter wheat, traded in Kansas City, managed money cut its net short by 7,173 lots, the biggest bullish swing in positioning in six months, and again reflecting a large decline in short holdings.
The short-covering – which drove wheat prices up 3% in Chicago and 4% in Kansas City over the week, making them the best-performing ags – followed comments from many observers that the extent of hedge funds’ negative bets was making such bearish positioning look a “crowded” investment.
However, with substantial short-covering now completed, and the net short looking more comfortable by historical standards, there were doubts as to how much more can be expected.
“Given the lack of fundamental support, these fund positions look very manageable,” said Brian Henry at Minneapolis-based broker Benson Quinn Commodities., noting ample global wheat supplies.
“One might look for additional short covering into year end, but it is going to take better technical action” than seen in recent trading.
‘Look for sharp moves’
Hedge funds were also notable buyers of corn in the week to last Tuesday, again driven by short covering, and of live cattle, which has been a notable loser this year, as the recovery in the US herd and cheaper feed have prices fed through into richer supplies of fattened animals.
However, the decision by speculators to extend their net long in live cattle futures and options to a three-month high is looking a better bet after separate official data late on Friday showed US feedlots taking in record low numbers of cattle in November.
Placements fell by 11.0% year on year to 1.60m head, well below the figure of a.719m head that investors had expected.
“Look for sharp moves early this week in livestock markets,” broker Allendale said.
‘Macro pressures’
Among soft commodities, hedge funds’ tendency to close positions ahead of year end was reflected in a sharp drop in the net long in New York-traded raw sugar futures and options, of more than 19,000 contracts, the biggest bearish shift in positioning since July.
The gross loss position slumped by more than 20,000 contracts, with a small drop in the number of short bets too.
The overall open interest reading for raw sugar fell by some 58,000 contracts, to 1.11m lots.
Rabobank flagged “macro pressures” on sugar prices, “as the Brazilian real lost 2% week on week against the dollar, while crude oil hit seven-year lows”.
A weaker real lowers the value, in dollar terms, of ags such as sugar in which Brazil is a major player, while oil effects sugar through the sweetener’s link to the ethanol market.
