(Agrimoney) – Hedge funds cut their bearish bets on agricultural commodities, led by a rethink of the extent of short positions on soft commodities, although grains remained out of favour.
Managed money, a proxy for speculators, cut its net short position in futures and options in the top 13 US-traded agricultural commodities overall, from corn to sugar, by 17,276 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The move reduced the net short to 64,439 contracts, well below the record 102,126 lots reached in mid-March, although still a historically bearish figure.
However, the cut in the overall net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – revealed a divide in thinking between prospects for New York-traded soft commodities and Chicago-listed grains.
‘Most bearish element’
In grains, hedge funds extended net short position by more than 6,000 contracts, with a particularly sharp downturn in sentiment on soymeal, the high protein feed ingredient produced from soybeans, in which they turned net short for the first time since January 2012.
Soymeal has fallen out of favour thanks largely to the ongoing, and large, South American harvests, with Argentina, the top exporter of the product, now some 20% through its harvest.
“Demand for US soybeans and products wanes, with China continuing the shift from US to Brazil supplies, and/or Argentine soybean and soymeal supplies,” said US broker CHS Hedging
Rabobank noted that “a record 1.38m tonnes of Brazilian meal exports were reported for March”.
From a technical perspective, the collapse of the premium in short-term soymeal futures to further ahead contracts has also concerned investors, with the May and July contracts trading at a par on Monday.
“The most bearish market structure element of the soybean market is the breakdown of the soymeal premiums,” said Darrell Holaday at Country Futures.
The spot soymeal contract had, since the autumn, “primarily maintained an $8-20 a-short-ton premium” over the second-in contract.
Nine-year high
The drop in sentiment soymeal was reflected in a further increase in hedge funds’ net short in soybeans too, which they raised to more than 48,000 contracts for the first time since October 2006.
Historically large net short positions tend to raise concerns among investors that appetite for such holdings is near its end, and can provoke a rash of short covering, putting upward pressure on prices.
That said, hedge funds have of late shown a willingness to stick with high bearish positions, as for example with New York-traded raw sugar, in which they have set a series of record net shorts this year.
In Chicago wheat, speculators nudged higher their net short position to 70,887 lots, edging nearer the record 78,928 lots set in September.
Wheat crops in most northern hemisphere growing areas are emerging in decent condition, provoking expectations for a strong world harvest this year, although drought concerns remain in the US Plains.
Less downbeat on sugar
However, among New York-traded soft commodities, hedge funds cut their net short position by more than 24,000 contracts – turning less bearish on all four major contracts.
This included raw sugar, in which the net short, having set a record high for five successive weeks, was cut by more than 11,100 contracts, as rains in Brazil raised concerns over a slow start to the 2015-16 cane crushing season, which began at the start of this month.
The Brazilian real has also over the past month recovered some ground against the dollar too, so improving the value, in dollar terms of assets such as sugar, in which the South American country is a major player.
Brazil is also the biggest producer and exporter of arabica coffee, in which hedge funds cut their net short position by 5,300 contracts.
Hogs vs cattle
In the livestock sector, the divide grew between lean hogs, in which hedge funds continued to cut their net long position – this time to 7,157 contracts, the lowest in nearly two years – and a cattle complex in which sentiment has been recovering.
However, positions reversed late last week, when cattle futures tumbled, on weaker values of cash cattle and wholesale beef, while lean hog futures rallied.
The dynamic was spurred by the closure of short hog-long cattle traders, which was also fuelled by a recovery in lean hog prices, which on the US cash market hit $61.03 per hundredweight on Friday, up $1.82 from Thursday’s value.
