(Agrimoney) – Hedge funds trimmed their net long position in agricultural commodities, despite more positive positioning on grains – a trend which has, ironically, questioned expectations of a spring rally in prices.
Managed money, a proxy for speculators, reduced its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by more than 8,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.
The cut in the net long position – the extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall – came despite a continuation by hedge funds of their turn bullish in positioning on corn and wheat.
Prices of wheat in particular gained over the week, by more than 4%, boosted by concerns of a squeeze on exports from Russia, a key origin for competitively-priced supplies.
Betting on price rises
Indeed, in Chicago wheat, the world benchmark contract, thanks to its liquidity, hedge funds raised their net long by more than 10,000 lots over the week to 15,294 contracts, the most positive positioning in six months.
The shift was led by covering of short positions, which fell below 80,000 for the first time since May, and looking increasingly unprofitable as the grain’s rally progressed.
Indeed, Chicago’s March contract during the week returned above its 200-day moving average for the first time since May, after also reclaiming other main moving averages, implying that just about all short bets taken out during that period show a paper loss.
In Chicago corn, hedge funds raised their net long by more than 6,000 lots to a seven-month high of 236,170 contracts, again reflecting in particular a closing of short positions.
‘Don’t have powder dry’
However, the extent of the positive positioning raised doubts about the extent of hedge fund ammunition left unspent to fuel further prices rises.
Speaking on wheat, Brian Henry at Benson Quinn Commodities, flagging speculators’ more positive positioning said that, “absent a new supportive headline, I’d look for lower price action”.
Another US broker, thinking in particular of corn, raised doubts over investor expectations of an early-2015 rally in futures.
“Many are looking at the spring rally from last year and expect this to repeat – however, the situation is very different,” the broker said.
“Last year, the managed money was net short corn in December,” by nearly 105,000 contracts as of December 17.
“This year they are holding a net long position of 1.181bn bushels.”
Given that hedge funds “don’t have much powder dry we don’t see the investment sector driving corn higher into the spring.
“In fact the strength may already be exhausted.”
Big net short on sugar
However, contrary the more positive positioning on grains, hedge funds cut their net long in soybeans by more than 7,000 contracts, amid improved prospects for South American harvests, after a dryness-hit start to sowings in Brazil.
Indeed, there has been talk of long grain-short soybean bets becoming increasingly popular, amid ideas that the prospect of strong South American production, after a record US crop, and forecasts for strong plantings next year, will drive prices of the oilseed sharply lower.
And, among soft commodities, hedge funds proved particularly downbeat on New York-traded raw sugar, raising their net short position above 62,000 contracts for the first time in 17 months.
Sentiment on raw sugar has been undermined by a better-than-expected finish to the output season in Brazil’s key Centre South region, and ideas that India, the second-ranked producing country, may return to subsidising exports.
However, again, the extent of hedge funds’ position in sugar has raised concerns over its appetite for more such bets, provoking ideas of a recovery in prices fuelled by short-covering.
Surprise feeder cattle showing
Hedge funds cut their net long position in Chicago live cattle futures and options too during the week, to a 2014 low, amid concerns over short-term demand, with retailers seen as having covered needs for beef supplies during the end-of-year holiday season.
In lean hogs, the net long fell by more than 5,000 lots to its lowest since August.
However, hedge funds raised their net long in feeder cattle by 819 lots over the week to 7,420 contracts – even amid a run of six successive closes down the exchange limit.
It is not clear whether this shift, down in the main to a cut in short positions, reflected in part an inability by investors to clear out of long positions while live cattle futures were locked limit down.
