(Agrimoney) – Hedge funds rebuilt their net long position in agricultural commodity derivatives at the fastest pace in eight months, led by increasingly bullish sentiment on corn, and a mass closure of bets on falling sugar prices.
Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by more than 56,000 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The increase in the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – was the largest in eight months.
It took the net long above 500,000 contracts for the first time since July.
And it came amid some revival over supply concerns for many commodities, in particular wheat, with harvest-time rains threatening quality downgrades in Argentina and Australia, even as a lack of rain is provoking concerns over winter wheat seedlings in Russia and parts of the US.
‘Liquidation risk lower’
Still, hedge funds, having a stack of short positions in Chicago wheat in the previous week, made few changes in the latest one – although the data were taken before the jump in prices in the latest two sessions on concerns over a squeeze on Russian exports.
In fact, at 12,103 contracts, the relatively low level of the net short in Chicago wheat – a contract in which speculators have historically proven unusually willing to hold short positions, often hedged against long bets in corn or soybeans – prompted some idea that further support to wheat prices from hedge funds may be limited.
“Bottom line, speculators aren’t nearly as short as they were six weeks ago and the ‘liquidation risk’ is much lower from here,” one US broker said, referring to the prospect of price support from mass closure of short positions.
“We see this as a good hedge opportunity and are recommending to get sold out of 2014 wheat and sell the first 25% of 2015 wheat,” the broker said, although adding that if hedge funds “show signs of building a long position, we need to respect that”.
Hedge funds have not since June held a net long in Chicago wheat.
Planting deterrent
The biggest turn positive in positioning was in corn, in which hedge funds raised their net long by more than 20,000 lots, taking it above 200,000 contracts for the first time in five months.
Sentiment for corn prices has been boosted in part by rising values of wheat, but also by the extent of the deterrent to plantings – as South American farmers were making sowing decisions – provoked by the drop in Chicago futures to a five-year low at the end of September.
Rabobank on Monday forecast a drop of 3m-4m acres (1.2m-1.6m hectares) in US sowings of corn in 2015, and a fall of 8% in plantings in Brazil of so-called safrinha corn, which is planted early in the calendar year, typically on land vacated by the soybean harvest.
‘Commercial buyers prevalent’
Hedge funds also turned notably less bearish in raw sugar, cutting their net short in New York-traded futures and options by more than 18,000 contracts to 35,595 lots.
The short-covering came in a week in which concerns over economic prospects for Brazil faded with the appointment finance minister of Banco Bradesco executive Joaquim Levy, who helped cut Brazil’s debt and pay back the International Monetary Fund at treasury secretary from 2003-06.
Brazil’s real strengthened notably, boosting the value in dollar terms of assets such as sugar in which the country is a major player.
At Commonwealth Bank of Australia, Tobin Gorey also noted the boost to sugar consumption prospects from lower prices.
“Commercial buyers have been prevalent, arresting each decline in prices,” he said, if “wondering how long that will persist,” given the extent of supplies built up by a succession of years of world production surplus.
