St Elmo Steak House

St Elmo Steak House

May 23rd, 2016

Commodity hedge funds raised bets on rising agricultural commodity prices to the highest in nearly two years, provoking concerns of a sell-off in the off – particularly in sugar, in which bullish betting hit a record high.

Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by nearly 65,000 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The buying took the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – nearly to 680,000 contracts, the highest since June 2014, and supporting talk around in the market of funds moving cash into ags.

As Agrimoney.com noted last week, many brokers have reported that the prospect of US interest rate rises, and potentially higher inflation, has prompted many investors to switch out of equities into commodities.
Commodity Futures: ‘General supply concerns’

However, the extent of the hedge fund net long, in raising questions over how much appetite funds have left for betting on ag price rises, raised market concerns on Monday of profit-taking by investors, in anticipation of a potential wave of position-closing by speculators.
Speculators’ net longs in New York softs, May 12 (change on week)

This dynamic was seen as a factor in a weak performance by ag commodities in early deals on Monday, but appeared a particular debate in the sugar market, in which managed money raised its net long to 215,954 contracts, the highest on readily available records.

Morgan Stanley, highlighting that “poor weather conditions in Brazil could slow” the cane harvest in the top sugar-producing country, said on Monday that “general supply concerns have led net non-commercial positioning to rise to the highest levels in more than 20 years”.

A series of reports last week flagged that – with Indian output set to fall strongly, and Chinese output in structural decline – the world appears poised for a second successive season of production deficit in 2017-18.

On Friday, the US Department of Agriculture warned that world sugar stocks “are approaching what appear to be historically low levels”, giving estimates implying that – on a stocks-to-use basis – supplies will become tighter than in 2010-11, when New York raw sugar futures topped 36 cents a pound.

St Elmo: ‘Funds don’t eat sugar’

However, raw sugar futures – which on Friday hit 17 cents a pound for the first time since October 2014 – showed small losses in early deals on Monday, amid concerns that the extent of fund buying already in sugar made for a top-heavy position.

Speculators’ net longs in Chicago grains, May 12 (change on week)

At Commonwealth Bank of Australia, Tobin Gorey, flagging funds’ “huge long positions”, said that “sellers are generally queuing up… after a [CFTC] report like that”.

London broker Marex Spectron, flagging the role of algorithmic funds in forcing sugar prices higher, said that most “in the trade” believed that “fundamentals are not sufficiently bullish to sustain the massive, and growing, long positions of non-human automatic funds.

“Funds don’t eat sugar, so one day the will have to sell.”

Marex added that it was “fairly convinced” that the fresh bullish talk in the market “is merely the old phenomenon of news following price – ie of people trying to find fundamental explanations of something which has little to do with fundamentals”.

Commodity Futures: ‘Getting blown out’

By contrast, hedge funds turned notably more bearish on cocoa over the week to last Tuesday, cutting their net long by 9,402 contracts, the third biggest week of selling in the past year.
Speculators’ net longs in Chicago livestock, May 12, (change on week)

Cocoa bean deliveries from producers to Ivory Coast ports “improved, and the announcement of a La Niña being now 75% likely before the northern fall [according to official US meterologists] lent the market a bearish atmosphere”, Rabobank said.

However, hedge funds were also active buyers in New York-traded coffee futures over the week to last Tuesday, amid concerns actually primarily centred on the robusta market, and drought concerns in Brazil, India and Vietnam.

And speculators raised their net long in Chicago grains and oilseeds too, particularly in the soy complex, in which concerns over soymeal supplies, spurred by reduced expectations for output from top exporter Argentina, have fuelled a marked rally.

“Are the funds buying [the soy complex]? First and foremost yes. Are some shorts getting blown out? Yep,” said Joe Lardy at US broker CHS Hedging.

As of Tuesday last week, managed money held its largest net long in Chicago soymeal futures and options in 18 months, and its biggest net long in soybeans themselves since March 2014.

St Elmo Steak House: Wrong-footed on livestock?

Hedge funds also hiked bets on rising livestock prices, the CFTC data showed, lifting their overall net long in Chicago-traded contracts to a 10-month high of more than 88,000 lots.

Amid what is typically seen as a strong period for US meat demand – with the barbecue season seen as starting on the Memorial Day holiday, in a week’s time – and amid strong beef and cash cattle markets, speculators hiked their net long in live cattle by 15,270 lots, the most in a single week since October 2013.

In lean hogs, in which sentiment has also been spurred by expectations of a rebound in US exports, speculators hiked their net long to a 19-month high of 58,111 contracts.

However, speculators’ bullish betting currently appears ill fated, with spot lean hog futures down 3.5% since Tuesday, as a stronger dollar has hurt US export hopes, and live cattle prices down 1.8% – and expected to fall further on Monday after official data showing unexpectedly strong placements of animals for fattening on feedlots.

- Agrimoney.