commodity investing 101

commodity investing 101

August 5th, 2015

Commodity hedge funds, having been bloodied by buying grains as the market tumbled, followed up with widespread selling in ags, turning more bearish on soft commodities and livestock as well as the likes of corn and wheat.

Managed money, a proxy for speculators, slashed its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by nearly 135,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The cut in the net long – the extent to which long positions, which profit when values rise, exceed short bets, which benefit when prices fall – was the second largest over the past two years.

And it came as hedge funds reversed their optimism on grains which appears to have caught them out dearly, in raising long positions even as corn, for instance, earlier this month suffered its worst week in a year.

Commodity Investing: Investors ‘astonished’

Indeed, the extent to which speculators were wrong-footed surprised many investors.
“There have been times over the last 10-12 years when the professional investors have picked up on signs of large market movements way before the commercial trade, but this last two or three months has not seen them at their finest,” said traders at a major European commodities house.
“They maintained their short positions in wheat and corn for far too long,” into a period of declining concerns over dents to crop production from weather worries such as extensive Midwest rains.

“Even as weather conditions improved, [speculators] continued to buy futures in both commodities, just as prices started to fall”.

Other investors were “astonished” to discover, a week ago, that hedge funds were still buying as late as two weeks ago, the traders said, adding that speculators’ loss had been to the gain of other investors, such as producers, who were able to sell into a strong market.

Commodity Investing 101: ‘Got the message’

Nonetheless, last week, hedge funds “seem to have got the message that crop prospects for US corn look much better and that chances of a revival in market prices are much reduced”, the traders said.

Indeed, managed money cut its bullish positioning in Chicago grain future and options by more than 108,000 contracts in the week to last Tuesday, including a 36,864-lot contract cut to their net long in corn.
July is in fact seen as having provided largely benign weather for Midwest corn in its key, heat-sensitive pollination phase.

In soybeans, for which improved Midwest weather boosted crop prospects too, hedge funds reduced their net long by 27,924 lots.

And in wheat, with the harvest of winter crop accelerating from a slow start to overtake the average pace, speculators lopped more than 15,000 contracts off their net long in Chicago, and for Kansas City hard red winter wheat returned to a net short position.

Commodity Futures: ‘Doomed to fail’

In New York-traded soft commodities, hedge funds extended a rebuild of a net short in raw sugar futures and options amid ideas of strong Thai inventories, and improved prospects for Indian output with monsoon rains proving more generous than had been feared, besides pressure from weakness in the Brazilian real.
A weak real cuts the value, in dollar terms, of assets in which Brazil is a major player.
“Though a rally from today’s very low prices looks possible, it also looks doomed to fail as its predecessors have,” said Marex Specton, deeming that “the barriers are in place” to a rebound in futures “and are very strong”.

And in arabica coffee, speculators raised their net short nearly to 23,000 contracts, a 20-month high, with futures also being undermined by the weak real, and by improved ideas for Brazil’s harvest, although these better hopes have been questioned by producers.

Commodity Trading: Cattle bulls quit

In the livestock complex, hedge funds also extended their sell-down in Chicago live cattle for a seventh successive week, cutting their net long by 10,554 contracts to 27,466 lots – the lowest in nearly two years.

The latest selling was encouraged by data showing that the number of cattle placed on US feedlots last month was, at 1.48m head, 0.9% higher than a year before, rather than the0.9% decline that investors had expected.

However, speculators raised their net long in lean hog futures and options, amid a recovery in prices of pork, and particularly pork bellies, helped by seasonal factors as well as ideas of improved US export prospects.

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