(Agrimoney) – Traders cautioned against getting too downbeat on hard wheat prices after hedge funds turned their most bearish on record on the contract, fuelling a third successive week of selldown in agricultural commodities.
Managed money, a proxy for speculators, cut by more than 18,000 contracts its net long 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 reduction in the net long – the extent to which long positions, which benefit when prices rise, outnumber short bets, which profit when values fall – took it back below 250,000 contracts for the first time since September.
And it reflected in the main reduced optimism over livestock contracts, and an increasingly bearish outlook on prices of Chicago-traded grains and oilseed.
Soy sell-down
Indeed, in soybean futures and options, hedge funds were substantial net sellers, of nearly 23,000 contracts, returning to a net short in the oilseed, amid a tailing off in orders by China, subsequently highlighted in below-forecast US export sales data, besides rains to boost prospects for newly-sown Brazilian crop.
Rabobank flagged “concerns of a pullback in Chinese bean buying and an improved, wetter central Brazilian weather outlook”, with dryness having held back sowings in Mato Grosso, the South American country’s top soybean-producing state.
However, one of the more surprising moves shown in the CFTC data was the extent to which hedge funds lifted their bearish bets on Kansas City-traded hard red winter wheat, a contract in which they had rarely been net short until this year.
In the latest week, the speculative net short on hard wheat rose by 4,008 contracts to 16,328 lots – the highest on data going back to 2006.
‘Doesn’t look like the best idea’
The shift contrasts with a reduced net short in Chicago-traded soft red winter wheat futures and options, cut by more than 15,000 contracts to well below levels above 50,000 two weeks before which stunned investors and fuelled a wave of short-covering.
And the contrasting take between hard and soft white price prospects was reflected in prices too, with values falling in a little in Kansas City over the week, compared with a rise of some 2% in Chicago.
The divergence reflects fundamental factors, with a second successive poor harvest cutting US supplies of soft wheat, while prospects for the 2016 US hard wheat crop have been boosted by rains in the southern Plains.
However, many investors believe that the underperformance of Kansas City futures – which drove them to a discount of more than $0.40 a bushel against Chicago on Thursday, December basis – has been overplayed, an idea that gained further support from the CFTC data.
“Despite a lack of fundamental features, adding to their net short in Kansas City doesn’t look like the best idea,” said Brian Henry at Benson Quinn Commodities.
Historically high net short, or net long, hedge fund positioning tends to provoke concerns that this bet has become “crowded”, and is vulnerable to a reversal, fuelling a price spike.
Kansas City wheat’s discount – the size of which had provoked ideas that some might be physically delivered against Chicago contracts to exploit the price gap – had narrowed to stand below $0.30 a bushel in morning deals on Monday.
‘Still very long’
By contrast, an increased net long in New York-traded raw sugar futures and options – by nearly 30,000 lots to 167,000 lots – raised ideas that this bet had run its course, and might encourage selling.
Another way of cutting the CFTC data, to show the net fund long outside index funds, came in a “massive 208,000 lots, its highest level since 2008”, according to London broker Marex Spectron.
Buying in sugar has been encouraged by central Brazil’s wet weather, which is slowing the cane harvest, besides by concerns over dryness in India and Thailand.
“Funds have probably given back most of their additional longs since Tuesday’s high,” Marex said.
“But the fact is that even if they have reduced, they are still very long.”
Low on the hog
Among livestock contracts, the main sell-down was in lean hogs, in which hedge funds cut their net long by more than 10,000 contracts, fuelling a price decline which drove December futures to 53.925 cents a pound on Friday, the weakest for a spot contract in six years.
The decline has been attributed to weak cash prices, encouraged by rising supplies and elevated inventories.
“Hog cash prices also have been extremely week the last few days, with producers apparently scrambling to get hogs sold now that supplies are quickly increasing,” a seasonal dynamic, said Paragon Economics and Steiner Consulting.
“End users are in the process of liquidating inventories of holiday items.”
