Hedge Funds Hike Bets on Ideas of Coffee, Hard Wheat Supply Squeezes

(Agrimoney) – Hedge funds bet hard on stories of squeezes in higher quality wheat, and coffee, markets, even as they cut bullish positioning on agricultural commodities overall, to the weakest in nearly five months.

Managed money, a proxy for speculators, reduced by more than75,000 contracts its net long position in futures and options in the main 13 US-traded agricultural commodities, from corn to cattle, in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.

The drop in the net long – the extent to which long positions, which benefit when prices rise, outnumber short bets, which profit when values fall – took it to 337,820 contracts, the lowest since mid-April, and well below a mid-June high above 950,000 lots.

And it reflected widespread selling among ags, with net longs falling in grain, livestock and soft commodities complexes, and only hedge funds raising bullish bets only in three contracts – New York-listed arabica coffee and cotton, and Kansas City-traded hard red winter wheat.

Hard vs soft

In Kansas City wheat, the bullish turn in positioning was only modest, by a net 301 contracts.

However, it contrasted with an increase of more than 10,000 lots in the net short in Chicago-traded soft red winter wheat to a 132,577 lots – a record bearish position for the contract, on data going back to 2006.

The gross short in Chicago wheat – which is of lower quality than its Chicago peer – also hit a record high, topping 200,000 lots for the first time.

The large bet on lower prices came despite futures already trading close to 10-year lows, but weighed by the prospect of record world wheat inventories.

‘Short-covering rally opportunity’

The extent of the net short in Chicago, at a time when downside for prices might appear relatively limited, has raised concerns that the market may be vulnerable for a spike upwards should funds be tempted by a bullish turn in the news flow to close their position.

“Funds are still really short and provide a short-covering rally opportunity,” said ag advisory group Water Street Solutions, noting the likelihood that thanks to low prices “US wheat acres will be down again for 2017”, from levels already the lowest in nearly 50 years.

However, the CFTC data revealed that funds were particularly attuned to the potential for outperformance, at least, in Kansas City contracts, amid growing ideas that while supplies of wheat overall are strong, those of higher quality wheat could face a squeeze.

The gap between the net shorts in Chicago and Kansas City, at 115,720 lots, was also the largest on records going back to 2006.

Feed vs food

The concerns over higher quality wheat reflect in part damage in some countries, such as France, from rains which can leach out fertilizers, depressing protein counts, and coming late in the season can encourage sprouting.

However, there is often a pay-off, in terms of lower protein levels, in high yielding crops, a factor some commentators see highlighted in this year’s Russian result.

And while prices of lower quality wheat are seen as being depressed by the need to compete with grains such as corn for demand from livestock feeders, those of higher protein wheat have, of late, outperformed.

In terms of US exports, US Wheat Associates flagged that “three months into the 2016-17 marketing year”, which for wheat began in June in the US, “total export sales-to-date of 11.8m tonnes are 18% ahead of last year’s pace”.

Hard red winter wheat sales were up 69%, compared with a 41% drop in soft red winter wheat orders.

Hurricane worries

Among New York-traded soft commodities, hedge funds raised their net long for the first time in four weeks, among some relief at the reduced chance of a US interest rate rise, to which industrial commodity markets tend to be more sensitive than their food peers.

Furthermore, there remain concerns over damage to the US crop from Hurricane Hermine earlier this month – with weekly crop progress data due later from the US Department of Agriculture expected to give an indication over the level of any setback.

Trading house Ecom said that the briefing “will be an interesting one, as it is the first post-hurricane report and will most likely paint a different picture to the last report”.

However, at Commonwealth Bank of Australia, Tobin Gorey said that “forecasters say field conditions have improved significantly in the week post Hermine”, even if west Texas, the top US cotton-producing state, “is still looking at a week or so of largely unwanted rainfall”.

Squeeze and roll

Meanwhile, in arabica coffee futures and options, speculators hiked their net long by nearly 10,000 contracts to 41,821 lots, the higher figure since October 2014.

The increase has been encouraged by mounting concerns over a broader coffee supply squeeze, worries encouraged by data early last week showing a surprise drop in Colombian output in August, and a downgrade by the official OBGE institute to its estimate for Brazilian production.

However, in raw sugar, hedge funds slashed their net long by more than 13,000 contracts, the biggest selldown in nearly five months, albeit one seen down largely to technical rather than fundamental factors.

Marex Spectron noted a spur to sugar market trading volumes from the forthcoming expiry of the October contract, prompting investors to revisit their positions in the contract, and potentially switch to distant lots.

“Interestingly, we have seen some good volumes in the October 2016-October 2017 spread since the beginning of the roll, as perhaps some funds see this as the best way to maintain a long position, rather than rolling to March 2017 at a 0.70 cents-per-pound cost,” the London broker said.