(AgriMoney) – Investors noted scope for further short-covering in wheat derivatives, after hedge funds eased back from a record bearish position, but raised doubts over the appetite for extending a large positive shift in raw sugar.
Managed money, a proxy for speculators, cut by more than 37,000 contracts its net short position in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.
The decline reduced the net short – the extent to which short positions, which benefit when prices fall, outnumber long bets, which profit when values rise – to a five-week low of 66,194 lots.
And it reflected a massive turn bullish in New York-traded raw sugar futures and options, besides some short-covering in wheat even ahead of the wave of such trades viewed as spurring a 7% leap in Chicago futures in the grain on Thursday.
‘Plenty of shorts to cover’
Some investors said that there appeared scope for further short-covering in Chicago wheat futures and options, in which hedge funds slashed their net short by 6,720 lots during the week to Tuesday, and are deemed to have closed further positions since.
Open interest, the number of live contracts, in Chicago wheat futures dropped by 7,859 lots on Thursday, and by a further 7,289 contracts on Friday, exchange data show.
The CFTC report “confirms minor short-covering on the initial stages of this recovery in Chicago” prices, said Brian Henry at Benson Quinn Commodities.
“Funds were net buyers the balance of the week, but have plenty of shorts to cover,” he added.
‘Feet held to the fire’
Indeed, he forecast further short-covering ahead, saying: “I expect the net short position has their feet held to fire one more time before this [upward price] correction is over.”
Separately, Tobin Gorey at Commonwealth Bank of Australia highlighted the unduly wet weather in some US winter wheat areas, which has raised flooding as a danger for a crop tested by drought for much of the growing season – and which has encouraged short-covering.
“Weather forecasters continue to expect soggy – and so worrisome – conditions in US hard red winter wheat regions in the next week or so,”
“That worry will, for now anyway, prevent the trade from selling heavily.”
Sugar dynamics
However, Mr Gorey was more doubtful over hedge funds continuing to turn positive in their bets on raw sugar, in which they slashed their net short position by 41,599 lots to 9,529 contracts – the biggest bullish shift in their holding since June.
The short-covering was attributed to factors including the appreciation of the real, which boosts the value of assets in which Brazil is a big player, besides the prospect of a New York sugar dinner last week which has reputation for encouraging bullish thinking in the industry.
But “seasoned observers” regard the heavy short-covering “as a negative” for prices, in removing potential buying pressure from the market, Mr Gorey said.
“It took a very large amount of buying to lift prices a little and all those gains have since been lost anyway.”
And with sugar mills “getting on with the task of selling their production… the market is unlikely get much lift as investors exit”.
‘Significant rally’
The reduction in the managed money net short in agricultural commodities was also driven by an even more positive take on livestock futures and options.
The speculative net long in Chicago hog and cattle futures and options combined hit a 2015 high of 123,652 contracts, led by a lift of 6,971 in the net long in lean hogs.
“Hog futures have mounted a significant rally in the last few weeks on improving seasonal demand in US retail markets, good export sales and a return to a more normal order flow from processors,” Paragon Economics and Steiner Consulting said.
Since late March, both cash and futures prices have risen by more than 40%, in a rally seen as reflecting the upcoming Memorial Day holiday, viewed as the start of the US barbecue season, besides by the decline in the dollar in boosting export competitiveness.
‘Soy complex sold off’
However, among soft commodities, funds continued to extend their net short positon in New York arabica coffee, to 10,077 contracts, a 17-month high, amid rising expectations for the forthcoming Brazilian harvest.
In Chicago, hedge funds, for the first time in a month, returned to increasing their net short in soybean futures and options, lifting it back over 50,000 contracts.
“The soy complex sold off in the week influenced by the May Wasde report,” the benchmark US Department of Agriculture crop report released on Tuesday, Rabobank said.
“The USDA forecast record-large ending stocks of US soybeans, at 500m bushels.”
