(Agrimoney) – A lucrative hedge fund trade of betting on lower sugar prices looks to have gone a little sour, with a return to increasing short exposure on the sweetener preceding a strong recovery in prices.
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 cotton, by 16,431 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The expansion of the net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – reflected largely a further selldown in grains, in which hedge funds lifted their net short to a record 236,815 contracts.
Net shorts in both Chicago soft red winter wheat and Kansas City hard red winter wheat were lifted to record highs.
Return to shorting
However, the increase in the net short also reflected a return to extending bearish positioning on New York raw sugar, ending a spree of hedge funds cutting short holdings in the sweetener.
The net short in New York raw sugar futures and options rose by 13,689 lots in the latest week, the first increase since late March, when bearish positioning was at a record high, and presented huge gains for hedge funds.
New York’s July raw sugar futures contract dropped by more than 20% over February and March, as fears eased over Brazilian drought, and over the idea of a world production deficit in 2014-15.
Weakness in the real helped too, in cutting the value in dollar terms of assets in which Brazil is a major player.
‘Change of sentiment’
However, the latest increase in the net short in raw sugar preceded a recovery in futures prices, which stand some 5% higher than as of the close on Tuesday, helped by a re
“There has been a change of sentiment, and this is confirmed by the market action,” Marex Spectron said.
“The market used to be unable to hold a rally. Now it seems unable to hold a decline,” the London-based broker said, citing the boost to demand from lower prices.
“It seems to us that as we approach 12 cents a pound in New York futures], demand increases so that, to put it crudely, the market cannot go down much more. And a market which cannot go down, goes up.”
Sugar prices have also been helped by a recovery in the real.
Grain positioning
Hedge funds late to shorting wheat are also a little out of the money, after a tour of Kansas, the top US wheat growing state, showed yield expectations below market forecasts, indicating recent rains have not yet provoked the crop recovery that many investors had hoped for.
The managed money net short in Chicago wheat futures was, at 111,409 lots, at a record high as of Tuesday, as was the net short in Kansas City contracts, at 14,730 lots.
However, in corn, speculators may be feeling more comfortable with an increase of 24,602 contracts in their net short, to 116,985 contracts, the highest in 16 months, but still below a high of more than 180,000 lots set in 2013.
Sentiment on corn prices has been undermined by a sharp pick-up in the pace of US sowings, cutting uncertainty over crop prospects.
Cotton, cattle buying
In cotton, meanwhile, extended wetness in the US South East cotton belt, in hampering sowings progress, helped persuade hedge funds to extend their net long in the fibre in New York above 50,000 lots for the first time in nearly a year.
“The week ending May 5 saw large increases in the net long position of both the hedge funds and the index funds,” said John Robinson, cotton marketing expert at Texas A&M University.
“This occurred under conditions of rising open interest – ie new position taking,” he said, although noting that the trend “had little price effect”.
In livestock too, hedge funds extended a trend of increasing long exposure, taking their net long in Chicago live cattle futures and options to a 2015 high.
Although feedlots are feeding cattle to higher weights, slaughter rates are running well below those a year ago, keeping a squeeze on beef supplies.
