Monday, April 14, 2014

Hedge funds end 'record' ag commodity buying spree


Hedge funds' longest run of bullish positioning by agricultural commodities in recent history ended as investors took profits on gains, as well as placing more bets on falling prices.

Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by nearly 38,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The decline reflected the first week-on-week drop in the net long position – the extent to which long holdings, which profit when prices rise, exceed short positions, which benefit when values fall – since January.

Indeed, it ended the longest unbroken run of raised net long positions since 2006, when easily accessible records begin, matching a nine-week run in 2006 itself.


The decline reflected in part profit-taking after strong quarter for agricultural commodities which, thanks to weather setbacks in Brazil and the US, and tensions in Ukraine, defied widespread expectations of declines.

Prices of corn, in which hedge funds cut their net long position during the week for the first time in 2014, gained 19.0% in Chicago during the quarter.

Arabica coffee, in which speculators reduced their net long by more than 2,500 contracts, sored 61% in New York.

Among livestock contracts, lean hogs soared 48% during the quarter on concerns for the impact of porcine epidemic diahorrea virus (PEDv) in the US, although they have eased back this month after a report implied the country's herd was less affected than had been thought.

Speculators' net longs in grains and oilseeds, Apr 8, (change on week)
Chicago corn: 270,137, (-5,699)
Chicago soybeans: 181,252, (-12,194)
Chicago soymeal: 72,289, (-390)

Chicago wheat: 43,189, (-1,836)
Kansas wheat: 40,978, (-4,731)

Chicago soyoil: 10,571, (-1,293)
Sources:, CFTC

'Shift in attitude'

However, open interest - the number of live contracts - eased just 1,000 contracts or so week on week to 1.45m lots, as hedge funds in many agricultural commodities replaced some long holdings with short ones, in anticipation of crop falls to come.

Reduced net long positions in the Chicago grains, livestock and soybeans, and in New York cotton, reflected rises in in short holdings as well as a drop in bets on rising prices.

Speculators' net longs in New York softs, Apr 8, (change on week)
Raw sugar: 124,806, (+2,259)
Cocoa: 67,994, (-1,656)
Cotton: 59,670, (-3,635)
Arabica coffee: 37,392, (-2,564)
Sources:, CFTC

Factors negative to crop prices which have emerged this month include some rain in the southern US Plains, where dryness has affected US winter wheat seedlings, as well as in central Brazil, where drought has caused significant damage to coffee trees, and reports of Chinese buyers defaulting on soybean import orders.

Indeed, Goldman Sachs on Monday forecast a 10% decline in crop prices over the next 12 months, with Chicago livestock futures seen falling by 2%, on a front contract basis.

At Benson Quinn Commodities, Brian Henry, thinking most of wheat, said that the CFTC report "confirms a slight shift in the attitude of the fund community as a lack of upward momentum triggered selling".

Appetite for sugar sated?

The only major US-traded agricultural commodity to avoid more bearish positioning was New York raw sugar, in which managed money raised its net long position by more than 2,200 contracts above 124,000 lots for the first time since November.

As with coffee, prospects for cane output from Brazil, the top producer, have been undermined by drought.

Fears for El Nino, which typically brings too much rain to Brazil, disrupting harvest and lowering sugar levels in cane, while undermining India's monsoon have offered continued support to prices.

Nonetheless, the speculative net long in raw sugar is now "nearing the uppermost level of speculative longs in recent months", a factor which "may have a negative pull on values and on sentiment", said Nick Penney, senior trader at Sucden Financial.

Although the net long did rise above 200,000 contracts in October, "this was during the period of the US government shutdown when reports were issued with a great deal of delay and the market could be said to have been trading blind".

Extreme net long or net short holdings raise concerns among investors, in questioning appetite for taking this positional trend even further.

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