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Commodity Hedge funds' preference for grains over softs 'has gone far enough'

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July 24th, 2017

Hedge funds' preference for grains over soft commodities – at its strongest since 2012 – may have gone far enough, with commentators foreseeing cause for buying in the likes of cocoa and coffee, but selling in corn and wheat.

Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, across grains, livestock and softs, by 27,373 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The move lifted the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall - to a four-month high for 330,543 contracts.

But the rise in the overall figure again concealed a preference for grains, including the soy complex, over New York-traded soft commodities, extending a trend that began in May.

Grains' advantage of 474,719 contracts over softs, in terms of net positioning, is the largest since November 2012.

'Still too long'

However, many commentators cautioned that the extent of hedge funds' positive position grains may have set the sector up for selling, with managed money holding more long bets as of last Tuesday than had been expected.
Speculators' net long in Chicago grains, July 18 (change on week)

Corn: 104,670, (+3,706)

Kansas wheat: 70,918 (-2,193)

Soyoil: 48,948, (+5,952)

Soybeans: 38,351 (+19,303)

Chicago wheat: 35,926, (-8,759)

Soymeal: -636, (+6,574)

Sources: Agrimoney.com, CFTC

Terry Reilly at Futures International said: "The trade was looking for funds to add a good amount of shorts to corn, Chicago wheat, soybeans, soymeal and soyoil" in the data.

"However, actual versus trade estimates had the funds more long than estimated," a shift typically viewed as a negative for prices in meaning less unfulfilled buying pressure than had been thought – and a greater weight of potential sellers.

Benson Quinn Commodities said that in corn "the fact that [funds] added length is a negative" for prices, adding that it should "offer a negative tone" for trading.

And in winter wheat, speculators "are still too long" despite some selling in the latest week,

"The winter wheat markets are trading too high," the broker added.

'As short as it gets'

By contrast, among soft commodities, Tobin Gorey at Commonwealth Bank of Australia pondered whether speculators "will yet be questioning the wisdom" of the extent of a retreat in positive bets on cotton, of which the managed money gross short hit a 15-month high of nearly 40,000 lots.

Speculators' net longs in New York softs, July 18, (change on week)

Cotton: 17,363, (-5,147)

Arabica coffee: -29,521, (+10,284)

Cocoa: -52,334, (-4,177)

Raw sugar: -112,050, (+5,698)

Sources: Agrimoney.com, CFTC

And in New York-traded raw sugar, Mr Gorey said that the CFTC data showed that "momentum investors were about as short as this group gets, historically anyway.

"This group had started to buy some of this back by last Tuesday," with the managed money net short down more than 5,000 lots week on week.

"But they probably have plenty more to buy back."

'Trend towards climbing prices'

Meanwhile, in coffee, Commerzbank flagged the potential for further short-covering – after hedge funds slashed their net short in New York-traded arabica futures and options by more than 10,000 lots, the biggest bullish swing in positioning for more than a year.

Speculators' net longs in Chicago livestock, Jul 18, (change on week)

Live cattle: 113,295, (-1,616)

Lean hogs: 79,899, (-4,290)

Feeder cattle: 15,714, (+1,818)

Sources: Agrimoney.com, CFTC

"The lower crop and exports from Brazil, the main producer country, coupled with the recent appreciation of the Brazilian real, are likely to lend further support to the prices," the bank said.

"We also expect the ongoing scepticism among short-term-oriented financial investors to keep the upswing on track."

And in cocoa, in which hedge funds raised their net short to a record 52,334 contracts, Commerzbank said that while bearish sentiment was "understandable, given the expectation of a massive crop increase in Cote d'Ivoire and high stock levels", such concerns "already seem to be priced in.

"We assume that the market is failing to take the risks on the producer side into account – for example the weaker US dollar, the lack of investment, the low purchase prices and the weak financial situation farmers are facing, not to mention possible political tensions in Ivory Coast.

"We expect to see a trend towards climbing cocoa prices in the coming months."

'Wall of production'

In the livestock complex, hedge funds for a fifth successive week cut their net long in Chicago live cattle futures and options – which appears prescient given negative sentiment spurred by data late on Friday showing placements on US feedlots reaching 1.77m head last month.

Managed money net long in top 13 US-traded ags and (change on week)

Jul 18: 330,543, (+27,153)

Jul 11: 303,390, (+330,243)

Jul 3: -26,853, (+168,555)

Jun 27: -195,408, (-132,124)

Jun 20: -63,284, (+14)

Jun 13: -63,298, (+176,502)

Jun 6: -239,800, (+4,808)

Sources: Agrimoney.com, CFTC

That was up 16.1% year on year, the highest June figure in more than a decade, and well above expectations for a figure of 1.62m head, equivalent to a 7.0% gain.

The report "showed huge placements and big on-feed numbers which leaves a wall of production ahead to pressure the market," said ag advisory group Water Street Solutions.

 - Mike Verdin Agrimoney.

See Also: Commodity Investing News Blog, Crude Oil, Gold, Coffee, Cocoa, Cotton, Orange Juice, Sugar