Hedge Funds Turn Sweeter on Wheat – Just In Time

January 16th, 2017

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Category: Grains

field-450x299(Agrimoney) – Hedge funds turned less downbeat over wheat futures ahead of last week’s data showing a surprise slump in US sowings, potentially limiting the prospects of further price rises, but appear caught out in cotton.

Managed money, a proxy for speculators, hiked its net long position in futures and options in the top 13 US-traded agricultural commodities, from coffee to corn, by more than 95,000 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 – reflected buying in all three major ag sectors, grains (including the soy complex), softs and livestock.

But the shift bullish was particularly strong in grains, in which hedge funds returned to a net long position, led by buying in corn and wheat.

Sweeter on wheat

The switch came as investors braced for a week in which index funds were forecast buying big in corn and in both Chicago and Kansas City wheat contracts amid the so-called rebalancing process.

This is an annual event in which index funds adjust their portfolios to weightings dictated by the index followed.

However, hedge funds’ apparent front-running of the index fund rebalance also limited their losses to Thursday’s surprise US Department of Agriculture data showing US winter wheat sowings for the 2017 harvest falling 1.8m acres more than investors had expected.

The data lifted prices, particularly of Kansas City-traded hard red winter wheat, which on Friday recorded their highest close in nearly six months on a front contract basis.

‘Greatly-reduced short’

Ahead of the data, hedge funds hiked their net long in Kansas City wheat above 23,000 lots for the first time in two years, in what looks like a profitable move, with prices up 4% in the last two sessions of last week.

Their position is not nearly as comfortable in Chicago soft red winter wheat, in which hedge funds appear to be in the main lumbered with loss-making positions, holding a large net short at a time when prices are above average levels up to the last 100 days and beyond.

However, they at least cut that net short in the run up to the USDA data, with their net short falling by 18,625 lots week on week to the lowest in six months.

“They remain short in Chicago, but have reduced their exposure on that position greatly,” Benson Quinn Commodities noted.

‘Negative factor’

Still, the extent of the shift also implies a more limited potential ahead for upbeat pressure on wheat futures, given hedge funds have already made some significant progress in that direction.

“I wouldn’t rule out upside potential in [wheat] markets, but I do expect the fund buying of the last couple of weeks to offer a negative tone,” Benson Quinn Commodities said.

For Kansas City futures, “the added length… strikes me as a negative factor” for trading early this week.

By contrast, the broker was more upbeat on potential for purchasing in soybeans, prices of which were supported late last week by factors such as Argentine weather worries and a Brazilian truckers’ strike, besides a lower-than-expected USDA forecast for US inventories of the oilseed.

“While the funds have been buyers late last week, they probably have some room to add length in soybeans and perhaps soymeal,” Benson Quinn Commodities said.

‘Vulnerable to liquidation’

Among New York-traded soft commodities – in which hedge funds lifted their net long by nearly 27,000 lots, the biggest week-on-week rise in four months – hedge funds may have left themselves exposed to losses in cotton.

A rise of 9,000, to a record 90,000 contacts, in the managed money net long in the fibre came ahead of a surprise USDA upgrade to the domestic harvest, and the estimate for US stocks at the close of 2016-17, factors blamed for a decline in futures prices late last week.

“The report was bearish, especially given that market expectations were for estimates and projections that were near unchanged,” said Louis Rose at the Rose Report.

At Commonwealth Bank of Australian, Madeleine Donlan said that “investors hold a large long position in cotton, which could leave the market vulnerable to some short-term liquidation”.

Traders at Ecom flagged the potential for further updates yet to the US harvest estimate, saying that “as the market continued to absorb last week’s Wasde report, the general market feeling is that Texas numbers will again need to be increased.

“With modules still sitting in fields it is impossible to get an idea of final numbers, however, we [expect] the
US crop estimation to keep creeping up.”

‘Cutting kills’

The CFTC data also confirmed ideas of fund buying which investors had reported in the Chicago live cattle market, with spot February futures surging up the exchange daily limit last Tuesday.

However, the buying may face the headwind of a stand-off by meatpackers, whose margins have been sent negative by higher cattle values.

The beef processing margin on Friday was a negative $26.76 per head of cattle, compared with a positive $54.39 a week before, according to HedgersEdge.

“We continue to heard about more [temporary packer] plant closings” expected for this week, said Jerry Stowell at broker Country Futures

“Packers appear to be cutting kills in an attempt to stabilise their margins, which have fallen $100 per head in the past two weeks.”

 

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