(Agrimoney) – Hedge funds undertook a sharp wave of short-covering as pessimism over agricultural commodity prices waned, particularly in sugar, in which they turned more positive on prospects at the fastest pace in 15 months.
Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to cotton, by 100,285 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The shift took the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 125,025 contracts.
And it was fuelled by a cut in short positions, of more than 90,000 lots, amid recovering markets for many agricultural commodities, with only cattle and cocoa among main contracts showing losses during the week.
The closure of short positions was evident in a cut to 1.38m lots, from 1.42m contracts, in speculators’ open interest – the total number of live contracts they hold.
‘Into positive territory’
The return to a more positive trend in positioning was led by New York-traded raw sugar, in which speculators undertook their biggest switch bullish in holdings since June last year, in the main thanks to closing short bets.
Indeed, hedge funds returned to a net long in raw sugar, and at the biggest amount in 14 months, fuelling an 8% rise in prices during the week to last Tuesday, and allowing them to profit from a further 8% gain since.
“For the first time since the summer of 2014, short-term-oriented market participants have noticeably switched their net positions into positive territory again,” Commerzbank noted.
‘Drop in cane crushing’
The trend has been spurred by poor weather in the two top producing countries – with excess rains, often linked in Brazil to El Nino, slowing the nation’s cane harvest, while a weak monsoon has provoked concerns over India.
“The consequences of a strengthening El Niño, coupled with the firmer Brazilian real, drove a transition in managed money’s net position” in sugar, Rabobank said.
In Brazil’s key Centre South region, “after a spell of favourable weather in August, rainy conditions through September led to a 25.9% year-on-year drop in cane crushing during the first two weeks of the month,” the International Sugar Organisation said on Monday.
“So far in the season, [Brazilian Centre South] sugar output is down around 11% versus 2014 as mills maintain a strong focus on ethanol production.”
Prices were boosted late last week by an uplift by Brazil to its gasoline price.
This is expected to feed through into higher ethanol prices, in turn boosting values of sugar, which need to rise to ensure their share of the cane harvest.
‘Surprising price firmness’
Hedge funds also cut their net short in New York-traded arabica coffee futures and options for the first time in six weeks, lifted ironically by concerns of dryness in some parts of Minas Gerais, Brazil’s top producing state.
Rains are needed at this time of year to encourage blossoming of coffee trees, and the setting of flowers, but have been sparse in many areas, Agrimoney.com was told last week at the Global Coffee Forum in Milan.
And in Chicago lean hog futures and options, they took their net long above 33,000 contracts for the first time in seven months, supported by resilient cash markets.
“Strength in the cash hog market arose from good slaughter margins for packers and surprising price firmness for pork products,” Rabobank said.
Oil rush
Within the grain and oilseed complex, hedge funds covered nearly 20,000 short bets in Chicago soyoil, encouraged by the surge in values of rival vegetable oil palm oil as dryness, blamed on El Nino, cuts output prospects in the key South East Asia producing region.
Palm oil futures are up some 19% in Kuala Lumpur in ringgit terms, strength which also reflects in part the weakness of the currency, so boosting Malaysian export prospects.
In wheat, managed money retained a somewhat gentle covering of short positions, amid the weather concerns in Australia, the former Soviet Union and parts of the southern US which have revived prices.
They retained a net short of 26,648 lots in Chicago wheat, a drop of some 20,000 lots over three weeks, but starkly more bearish in positioning than net longs above 30,000 contracts seen in July.
