(Agrimoney) – Hedge funds, negotiating the markets sell-off amid China jitters, again struggled to call coffee futures right, making their biggest bearish in shift in history on arabica – only for prices to stage a modest revival.
Managed money, a proxy for speculators, cuts its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 39,704 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The sixth successive weekly reduction took the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to a two-month low of 141,509 contracts.
And it came amid a period when fears over China’s economy crystalized, sending shares sharply lower, and seeing the CRB commodities index on August 24 hit its lowest since December 2002.
China factor
The reduction included a drop of nearly 19,000 contracts in the net long in Chicago soybean futures and options, as might be expected given that China is the top importer of the oilseed.
The sell-down left the net long in soybeans at just 775 lots, the lowest in two months.
However, China-related selling was not as prevalent in some other commodities of which the country is a huge buyer, including sugar, of which the country is the top importer, with buy-ins estimated at 4.50m tonnes for 2014-15 by the International Sugar Organisation.
Speculators trimmed their net short in raw sugar futures and options by 519 lots over the week.
In cotton, of which China is also the top importer, managed money raised its net long in New York-traded futures and options by more than 2,500 contracts to 53,313 lots.
The gross short in cotton, at 11,457 lots, fell to a 15-month low.
Coffee u-turn
And hedge funds’ saved their biggest sell-off for a commodity, arabica coffee, in which China holds little influence over pricing, cutting their net long in New York-listed futures and options by 19,927 lots during the week.
That was by a distance their biggest sell-off in arabica coffee on records going back to 2006, and looks a sign of many of them crystalising losses as prices plunged by 13.3% over the week.
Hedge funds had undertaken a buying spree ahead of the price tumble, turning net long for the first time in nearly six months.
However, in returning to a substantial net short in arabica coffee in the latest week, hedge funds may have been wrong-footed again, with prices recovering nearly 3% since.
Brazil forecasts
Arabica coffee prices have revived with ideas that Brazil’s harvest has fallen short of expectations of 50m bags or more – thinking that came to a head on Wednesday when Volcafe cut its forecast for the crop by 3.6m bags to 48.3m bags, citing smaller-than-expected beans.
“While agricultural yields (cherries per tree) have met our expectations for the most part, the average bean size of the current harvest is much lower than anticipated, and our conversion yield assumptions (cherries per bag) were too high,” the coffee house said.
Crucial to price direction from here will be conditions for Brazilian coffee tree blossoming, ahead of the 2016 harvest.
Research institute Cepea has reported somewhat irregular blossoming in arabica regions to far, although with Climatempo forecasting 10mm-30mm of rain in Brazil’s coffee belt in the two weeks to September 10, there are hopes of flowering improving.
Cattle sell-off
In the livestock complex, hedge funds also in the latest week returned to selling cattle, cutting their net long in feeder cattle (those ready to be fattened) to the lowest since July 2013, and in live cattle (finished animals) to the lowest since April 2013.
Live cattle futures fell to a 14-month low last Wednesday, undermined by worries over broader economic malaise, fuelled by China’s woes, which could cut demand for beef, which as a relatively expensive meat is typically particularly vulnerable to consumer cutbacks.
The weaker prices for live cattle, in curtailing feedlot margins and demand for animals to fatten, have fed into the feeder cattle market too.
‘Worst year ever?’
A report last week from Paragon Economics and Steiner Consulting, based on LMIC data, said that “estimated cattle feeding returns are mired deep in red ink – in fact, 2015 could turn out to be the worst year ever.
“For 2015, an annual average loss of $180.00-195.00 per steer is projected,” a “stark contrast” to last year, which was the most profitable for feedlots since 2003.
Official data on August 21 showed feedlots cutting their placements of feeder cattle by 12,000 head, or 0.8%, in July.
Investors had expected the data to show an increase of 0.9%.
