Hedge funds cut their net long position in agricultural commodities for a third week, but not by enough, in grains, to fend off fears of a further selldown, with latest bearish positioning focused on sugar instead.
Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 51,236 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.
The reduction represented a third successive weekly decline in the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall.
And it represented selling across all three complexes, with hedge funds cutting their net longs in New York-traded soft commodities, Chicago-listed livestock contracts, and in grains including the soy complex.
'Length to liquidate'
However, the reduction in the net long in grains was not as substantial as some investors expected, leading to questions about whether more bearish positioning might be in the offing, even allowing for the fact that considerable further selling has already been undertaken since the data were taken on Tuesday.
|Speculators' net long in Chicago grains, Mar 7 (change on week) |
Soybeans: 127,638, (-3,938)
Corn: 80,081, (-2,054)
Soymeal: 61,533, (-8,949)
Kansas wheat: 35,105 (-2,252)
Soyoil: 26,364, (-682)
Chicago wheat: -63,180, (-7,714)
Sources: Agrimoney.com, CFTC
"The funds aren't as long as they were, but they do have length to liquidate in corn, beans and the hard wheat markets," said Benson Quinn Commodities.
And in soft red winter wheat - as traded in Chicago, the global benchmark contract - there was potential to see funds "adding shorts"
"Fund selling is the key component in the winter wheat markets."
'More work to do in selling'
While funds in the latest week raised their net short by more than 7,000 lots to 63,180 contracts, that remains well below a high of 151,417 lots reached in October, suggesting considerable further scope for selling.
Speculators' net longs in New York softs, Mar 7, (change on week)
Arabica coffee: 8,780, (-5,613)
Meanwhile, in Chicago corn, the managed money net long fell by a modest 2,054 contracts to 80,081 lots, remaining relatively high - and, indeed, contrasting strongly with a net short of more than 100,000 lots in the contract entering 2017.
In soybeans, meanwhile, in which speculators retain a net long of more than 127,000 lots, "it looks like [funds] have more work to do [in selling] given the weak fundamental structure," Benson Quinn Commodities said.
"Every new low for the move should trigger additional fund selling."
Ag advisory group Water Street Solutions added that "the comfortable supply situation will keep a lid on rallies until growing season can factor into the equation".
However, it also flagged that typically "it's the wrong time of year to being getting bearish grains", with the northern hemisphere spring sowings window opening up, a time which often sees investors inject premium into prices to allow for the risk of weather upsets.
'Still in selling mode'
In fact, it was New York-traded raw sugar which proved the biggest target of fund selling for the week, with speculators cutting their net long to less than 120,000 contracts for the first time in a year.
Speculators' net longs in Chicago livestock, Mar 7, (change on week)
Live cattle: 97,149, (-1,021)
Lean hogs: 45,890, (-7,379)
The exit came in week in which prices dropped more than 4%, a tumble Rabobank attributed to "favourable Brazilian conditions and a decline in the ethanol parity, to below 15 cents a pound", meaning that sugar needs less appeal, in the form of elevated prices, to complete for its share of cane.
The drop in ethanol parity was also noted by London broker Marex Spectron as a driver behind the drop in sugar prices, along with the "diminishing… danger of a weather problem" in either of the top two producing countries, Brazil and India.
"Centre South Brazil has had good rains, and fears of another El Nino event look as if, if it comes, it will be too late to materially affect the Indian monsoon," Marex said.
"Funds are still in selling mode."
'Reality check' ahead?
In cotton, by contrast, hedge funds retained a bullish bias, driving their net long 6,268 lots higher to 106,034 contracts, a fresh record top on data going back to 2006.
"Investors are clearly not too fazed by the fact that the 2016-17 global balance sheet continues to grow," said Tobin Gorey at Commonwealth Bank of Australia, although flagging that the buying may be setting the market up for a steep fall.
"We remain concerned that a yawning gap is developing between futures prices and their underlying fundamentals.
"The market might get a reality check later this month as the US planting story shifts into focus."
'Seasonal trend vs reality'
Nonetheless, in New York-traded soft commodities overall, hedge funds cut their net long by more than 16,000 lots to 201,659 contracts, the lowest since April last year.
In Chicago-traded livestock, the hedge fund net long fell below 150,000 contracts for the first time in 2017, led by selling in lean hog futures and options.
"Expanded" US pork production, rising at a rate of 3.3% year on year according to latest weekly official data, "has the market wrestling with the seasonal expectation of a summer rally and the reality of ample supplies", said Water Street Solutions.