Hedge funds’ record bearish grain bet spurs ideas of price bounce

Hedge funds started 2016 by taking their most bearish position ever on grains provoking ideas of a wave of covering of short positions which would leave many speculators facing early-year losses.

Managed money, a proxy for speculators, lifted its net short position in futures and options in the top 13 US-traded agricultural commodities, from cotton to soybeans, by 81,854 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The increase took the net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain to 90,269 lots, the highest in seven months.

And it was led by a jump in the net short in grains, including the soy complex, by 80,160 contracts to 357,829 contracts by a distance the highest on records going back to 2006.

Large shorts

Sentiment in grain markets has been hurt by factors including ideas of ample world supplies, after a series of strong harvests, and by the coming to the market of lowly-priced Argentine exports, after the country reformed export taxes and quotas, and allowed the devaluation of the peso.

Speculators’ net longs in grains and oilseeds, Jan 5 (change on week)

Chicago soyoil: 47,380, (-13,515)

Kansas wheat: -18,143, (-3,168)

Chicago soymeal: -49,388, (-8,545)

Chicago soybeans: -79,547, (-16,032)

Chicago wheat: -96,143, (-13,023)

Chicago corn: -161,988, (-25,877)

Sources: Agrimoney.com, CFTC

In wheat, in which Argentina demonstrated its renewed competitiveness at an Egyptian tender before Christmas, managed money raised its net short holding in Chicago by more than 13,000 lots to 96,143 contracts, approaching the record bearish positioning of 111,409 lots set in May.

In soybeans, in which Argentina is seen as having particularly large supplies to sell, speculators raised their net short by 16,032 contracts to a seven-month high of 79,547 lots.

Meanwhile, in Chicago soymeal futures and options, the net short hit 49,388 lots, the third largest on record a feat matched by corn, in which the net short rose by more than 25,000 lots to 161,988 contracts.

Positive for prices?

The extension by hedge funds of their net short in grains follows a profitable 2015 for bets in price falls, with Chicago wheat futures tumbling 20% last year, and soymeal 27%.

Speculators’ net longs in New York softs, Jan 5 (change on week)

Raw sugar: 156,567, (-9,243)

Cotton: 42,450, (-8,857)

Cocoa: 40,091, (-2,563)

Arabica coffee: -8,101, (+7,080)

Sources: Agrimoney.com, CFTC

However, extreme net short, or net long, holdings tend to unnerve investors in suggesting that appetite for such positions may be spent and that a reversal in prices, and potentially a spike, may be in the offing as some of the bets are closed.

Benson Quinn Commodities said that, for grains, “there could be some follow-through buying based on” the CFTC data.

For corn, the broker termed the statistics “supportive”, while adding that it “would lean towards the funds being too short soybeans and soymeal”.

For Chicago wheat, the broker said that “between the size of the fund position and better technicals, it feels like the funds are going to need to cover some of their short position”.

‘Surge in short-covering’

Separately, traders at a major European commodities house said that investors “will be watching carefully the increasingly large short positions held by the investment funds in the US wheat futures markets.

Speculators’ net longs in Chicago livestock, Jan 5, (change on week)

Lean hogs: 19,003, (+5,549)

Live cattle: 16,094, (+5,013)

Feeder cattle: 1,456, (+1,317)

Sources: Agrimoney.com, CFTC

“Clearly, any turnaround in prices is likely to be followed by a surge in short-covering, causing values to rise further.

“Could that turnaround come as soon as this week?”

One big determinant in price progress this week is likely to be a slew of reports on Tuesday from the US Department of Agriculture, which releases not just its monthly Wasde crop supply and demand report by statistics on domestic grain stocks and winter wheat plantings.

Softs and livestock

Hedge funds turned more bearish too on New York-traded soft commodities in the latest week, cutting their net long by 13,583 contracts to 231,007 lots.

Speculators’ position in the top 13 US-traded ag commodities, and (just in grains, including soy complex)

Jan 5: -90,269, (-80,160)

Dec 29: -8,415 contracts, (-277,669)

Dec 22: 109,766 contracts, (-165,341)

Dec 15: 190,679 contracts, (-90,382)

Dec 8: 169,086 contracts, (-128,168)

Sources: Agrimoney.com, CFTC

The decline reflected a retreat in bullish sentiment on cotton – amid increased ideas for US sowings this year, besides by concerns over China, and for the knock-on effect of the index fund rebalancing process besides a further retreat in sugar from a near-record net long reached last month.

However, hedge funds raised their net long in livestock futures, thanks to swings bullish in positioning of more than 5,000 contracts in both lean hogs and live cattle.

Live cattle futures in particular have been strong over the past three weeks, helped by US storms, which reduce the ability of animals to put on weight, as a well by a report last month showing record-low placements of cattle for fattening on feedlots.