Hedge funds ended a bearish betting spree on ags dating back to July, despite higher-than-forecast crop supply estimates in a much-watched report – sparing themselves losses, indeed, to price resilience since.
Managed money, a proxy for speculators, reduced its net short position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 57,427 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The reduction in the net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – was the first in seven weeks, ending a spree during which sales exceeded purchases by nearly 500,000 contracts.
And the buying came despite the US Department of Agriculture on Tuesday, in its monthly Wasde report on world ag supply and demand, confounding market expectations by raising estimates for US corn and soybean yields, while also hiking hopes for the US cotton harvest to well above forecasts.
Weakest since 2008
Nonetheless, hedge funds swung bullish on positioning on all three complexes – grains, soft commodities and livestock – a shift which has been, marginally, rewarded by subsequent markets moves.
Prices, as measured by the Bcom agricultural commodity sub-index, have risen by some 1% since then.
Indeed, the reluctance by hedge funds to extend bearish bets tallies with ideas from some commentators that the fall in ag values has gone far enough, with the Bcom agriculture sub-index late in August touching its lowest since December 2008, at the height of the world financial crisis.
Low point passed?
In fact, managed money extended its short position in Chicago corn, one contract over which the debate is particularly strong over whether a late-August low represents a seasonal nadir, or only a temporary floor.
US broker Benson Quinn Commodities said that “seasonally”, futures in corn, and soybeans, “hit harvest lows around October 2” as the spike in fresh supplies weighs on values, adding that “I see no reason why this year will be different”.
But commentators such as Florida-based Roach Ag have suggested that corn futures may indeed hold above the late August low.
Water Street Solutions said that the “market is too low to sell but is lacking enough news yet to scare the shorts out”.
‘Not as comfortable being short’
In many other grain contracts, hedge funds took a more upbeat position, turning more positive in positioning on Chicago wheat for the first time in nine weeks, while near-eradicating their net short in soybean futures and options.
Soybeans are one contract in which “funds aren’t typically as comfortable being short”, Benson Quinn Commodities said.
The average managed money position in Chicago soybeans over the past five years is a net long of nearly 65,000 contracts.
In soyoil – one commodity whose bullish credentials were enhanced by the Wasde, which hiked expectations for use of the vegetable oil by biodiesel plants – the net long rose above 100,000 contracts for the first time this year.
Meanwhile, among soft commodities, hedge funds continued to reduce their net short in New York-traded raw sugar from last month’s record high, amid ideas that values of the sweetener had gone low enough to persuade Brazilian mills to turn more cane into ethanol instead.
And in cotton, they ended the week with a net long raised by 14,000 contracts, taking it to a three-month high above 70,000 lots, despite the Wasde hiking the forecast for US production in 2017-18 to well above market expectations – although this did not include a full appraisal of hurricane damage.
In fact, after tumbling ahead of the Wasde, futures have flat-lined since, with trading house Ecom flagging support to data on “on call” cotton, ie that in the physical market which has yet to be priced against futures.
As of September 9 “mills need to fix 32,000 futures contracts compared to the producers only needing to still fix 18,000 of contracts,” Ecom said, adding that “this means there are 14,000 more futures contracts to fix on the buying side.
“Therefore we believe, as the futures drop more, mills will come in to fix their on call contracts.”
Furthermore, there are some estimates of substantial damage, if not necessarily losses, to the US crop from hurricanes Harvey and Irman, with Rabobank estimating the latter storm may have affected about 1m bales.
‘A lot faster, and a lot earlier’
In the livestock complex, a turn more bullish in positioning reflected betting on higher cattle futures, amid ideas of beef demand being spurred by a dip in prices from early summer highs, while hedge funds continued to sell down lean hogs.
Indeed, speculators cut their net long in Chicago lean hog futures and options to a three-month low, as October futures headed down to 58.25 cents a pound last week, the weakest price of 2017 for a spot contract.
The decline reflects a tumble in US cash hog prices, in turn seen as down to the boost to pork output from rising slaughter weights.
Livestock analysts at Steiner Consulting – noting a boost of 3.5 pounds month on month to 210.7 pounds in the average weight of producer-sold barrows and gilts, as of September 12 – said that this may not seem like a significant increase.
“But 3 additional pounds of pork on 2.3m hogs slaughtered in a week represents an additional 8m pounds just on the weight gain alone.”
“The issue right now is that hog weights are increasing a lot faster, and a lot earlier [seasonally], than they normally do,” with growth usually accelerating later in the year, helped by cooler weather and fresh corn.