(Agrimoney) – Hedge funds extended their bearish positioning on agricultural commodities to the second highest on record despite, with northern hemisphere spring sowings underway, weather upsets could prompt a rash of short-covering.
Managed money, a proxy for speculators, lifted its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 3,584 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator showed.
The move lifted the net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – to 81,715 contracts.
That is the second biggest net short on records going back to 2006, behind only the 102,126 lots reached earlier last month.
And it reflected an extension of short bets in many grains, despite a spring sowing period which, in being dependent for success largely on weather, often prompts investors to inject risk premium – raising long exposure rather than short.
‘Show me mood’
Richard Feltes at Chicago broker RJ O’Brien flagged a “strong tendency for managed funds to accumulate ag longs between April and June to capitalise on inevitable crop scares”.
Hedge funds’ “unusually large” short exposure suggests they are a “in ‘show me’ mood” over the potential for grain price rises, “given a record South American soybean crop, large US on-farm ownership of old crop corn”, and the International Grains Council forecast of a drop of only 10m tonnes in world wheat output in 2015-16.
However, at Global Commodity Analytics, Mike Zuzolo said that a downgrade to 93.0m tonnes last week by the US Department of Agriculture bureau in Brasilia to its forecast for the ongoing Brazilian soybean harvest could spur short-covering, at least in the oilseed itself.
“Not only was this reduction surprising given the lateness of the crop year, it was even more surprising given that private trade estimates for this crop have been rising—some as high as 94.5m tonnes,” Mr Zuzolo said.
The downgrade, especially if it prompts a cut to the official USDA estimate for Brazil’s soybean crop in the April 9 Wasde crop report, “takes some of the sting out of the prospects for increasing production from Argentina.”
“I think we need to be more prepared for additional short‐covering after the April 9 report,” provided the dollar is not rallying, and so putting downward pressure on prices of dollar-denominated exports, he said.
Happier with big positions
In fact, hedge funds held a net short of 46,201 contracts in Chicago soybean futures and options, as of Tuesday last week – the largest net short in nearly nine years, the CFTC data showed.
Historically large net short, or net long, holding often provoke a reversal, with a corrective action on prices, with speculators concerned about the appetite remaining to press this position further.
However, in raw sugar in particular, they have this year shown an increasing willingness to stick by large short positions.
Although managed money cut its bearish positioning in New York raw sugar in the latest week, the drop was of a modest 1,247 lots and left the net short at 115,737 contracts – a figure second only to the previous week’s record high.
Bigger wheat short
Hedge funds also raised their net short in Chicago wheat by 4,526 lots, to more than 70,000 contracts, getting within range of the record high of 78,928 lots reached in September last year.
Sentiment on wheat has been undermined somewhat by reduced worries over Russian production, after a benign winter for seedlings which had been pressed by a dry autumn, although dry conditions in parts of the US Plains remain a concern.
Meanwhile, back among softs, hedge funds extended their net long in arabica coffee to a 15-month high of nearly 10,000 contracts, amid fears for the impact of Brazilian dryness which have waned, if not evaporated.
In Chicago lean hogs, managed money cut its net long to a 23-month low of 10,783 contracts, amid increased confidence in pork supplies, after official data showing a bigger-than-expected US hog herd, if with stocks of breeding animals a little lower than thought.
However, speculators were more positive on cattle contracts, as well as in New York cotton, for which sentiment has gained some support from the prospect of weak US sowings this year.
Rabobank last week termed cotton its more bullish bet among row crops.
