Wednesday, September 4, 2013

Hedge funds more positive on ags - but not cotton


Hedge funds rebuilt their exposure to rising agricultural commodity prices despite the biggest turn bearish on record on cotton, fuelling a slump in futures spurred by improved production hopes.

Managed money, a proxy for hedge funds, raised its net long position in futures and options in the major US-traded agricultural commodities by more than 65,000 lots in the week to August 27, according to data from the Commodity Futures Trading Commission, the US regulator.

That took the position nearly to 300,000 contracts, a two-month high, and representing a marked recovery from a net short of 2,686 lots early in August, the only net short on records going back to 2006.

And it defied a collapse of nearly 24,000 contracts in the net long on New York cotton futures and options, the biggest turn bearish on prices of the fibre on record.

'Challenge the record crop'

The change in tack comes amid improving hopes for production in many geographies, notably the US itself, where the condition of the cotton crop improved in late August.

The proportion of US cotton rated "good" or "excellent" was, as of August 25, 47%, up four points in two weeks, according to US Department of Agriculture data, as rains shifted from the South East, where excess moisture had been hurting crops, to Texas, where rainfall is needed.

Furthermore, a strong monsoon has boosted output hopes in India, the second-ranked producer, which is now looking at a 28m-bale crop, according to Rabobank, which has said that the drop in commodity currencies has lifted hopes for southern hemisphere crops too in boosting margin potential.

"Australian cotton production is expected to challenge the record crop of 2013-14, and is forecast to reach 4.9m-5.55m bales at this preliminary stage," Rabobank said.

"Brazilian production is expected to lift 30% year on year to 7.5m bales in the 2013-14 season," above the USDA forecast of 7.0m bales.

China factor

The increases offset expectations of a fall of some 7% in to 32.5m bales, 500,000 bales below the USDA forecast, to output in China, where focus has also returned to the potential ending of a cotton farmer support policy which has been seen has lifted values worldwide.

Luke Mathews at Commonwealth Bank of Australia flagged talk that "China is preparing to end its current, and controversial, cotton stockpiling program and possibly shift to a direct cotton subsidy".

The programme, in offering farmers a guaranteed price well above international market values, has left the state with huge inventories, while prompting mills to turn to imports, and often finding their costs lifted such that they become uncompetitive.

Chinese yarn imports hit a record 200,000 tonnes in July, as textile companies turned abroad for cheaper supplies.

Soybeans in vogue

Turns more positive were seen in hedge fund positioning on corn and, especially, soybean futures and options as dryness and heat dented prospects for Midwest crops.

Managed money raised its net long in to a two-month high of 138,182 contracts, adding more than 90,000 lots in two weeks, a bullish surge beaten only twice previously.

In Chicago wheat, futures in which have followed row crops higher, hedge funds cut their net long position by nearly 13,000 contracts.

However, the revived crop prices have, in trimming expectations of a slump in feed bills, reduced bullish sentiment on livestock, with hedge funds cutting their net long exposure to lean hogs by 5,706 lots during the week.

That broke a 20-week streak, dating back to April, of unbroken increasing net long exposure, to a record high of 81,905 on August 20.

Hedge funds did continue to raise their net long in feeder cattle, after data showed the herd being fattened on US feedlots far smaller than expected, hinting at tight supplies, and elevated prices, ahead.

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