Hedge funds bought “big” in grains amid ideas of tightening supplies spurred by weather worries and US crop downgrades – but producers are selling heavily too, with their hedging through derivatives hitting a record high.
Managed money, a proxy for speculators, raised its net long in futures and options in the top 13 US-traded commodities for a record 13th successive week in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission shows.
The net buying drove the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 1.07m contracts, a fresh six-year high.
And it reflected in the main net buying in grains, including the soybean complex, in which funds expanded their net long to 627,356 contracts, also the highest since spring 2014.
‘Big fund buying’
The CFTC report “confirms big fund buying through Tuesday” in grains, Benson Quinn Commodities said, highlighting a 36,403-contract increase to a 15-month high of 170,869 lots in the managed money net long in Chicago corn futures and options.
In Kansas City hard red winter wheat, speculators raised their net long to a two-year high.
By contrast, in soybean futures and options, managed money proved a net seller for the first time in two months, amid concerns over the near-record net long funds had built in the oilseed, which leaves prices prone to a rapid slide if speculators are prompted into a selldown.
‘Caught off-guard’
However, the elevated prices spurred by the fund purchasing attracted marked producer hedging too, with the CFTC data also showing that the number of short positions in grains held by commercial sellers, at 2.60m contracts as of last Tuesday, hit its highest on record.
The gross short in Chicago corn futures and options hit a 14-month high, and that in soft red winter wheat the largest in nigh on two years, while that in soybeans built on the previous week’s record to top 700,000 contracts for the first time.
Large commercial short position are viewed by some investors in being a bullish sign, in meaning that substantial selling pressure from harvests has already been absorbed.
The data show commercial buyers as less extended, with their net long in grains, at 1.23m contracts, only representing a two-month high, and indeed some 250,000 contracts below a record high, with some ideas that ag users have been wrong footed by the ag price rally, and may be forced into high-priced purchased.
“I am hearing many comments that the commercial end user got caught off-guard,” Benson Quinn Commodities said.
‘Danger for the bulls’
Among New York-traded soft commodities, hedge funds raised their net long nearly to 350,000 contracts in the week to last Tuesday, hitting the highest since 2016.
The gain was driven by further purchasing in raw sugar futures and options, at a four-year high of 242,343 contracts – provoking concerns from Marex Spectron that a price tumble could be on the way if funds are spurred into selling by bearish news, such as a potential announcement of a fresh Indian sugar export subsidy package.
“It is clear that the danger for the bulls of an Indian export subsidy is immediate – it could happen at any time,” Robin Shaw at Marex said.
“If Indian export news causes a sharp sell-off, that could snowball and trigger fund selling.”
Mr Shaw added that the “default position for the sugar market is bullish” nonetheless, thanks to factors such as continuing Chinese demand for sugar imports, and uncertainties over the impact of recent dryness on Brazil’s 2021 cane yields.
Cotton price strength
However, producer selling among softs is notable only amongst cotton, in which commercial investors raised their gross short to the highest in nearly two years – even as the managed money net long hit a two-year high.
The recovery in cotton prices, to more than 70 cents a pound in New York, has taken many investors by surprise, given the extent of world inventories of the fibre, consumption of which has been badly hurt by the knock-on effects of the coronavirus pandemic.
“We have been sceptical that prices would get return to pre-pandemic levels,” said Tobin Gorey at Commonwealth Bank of Australia.
“A seven ‘handle’ on prices though is a challenge to that scepticism,” he added, seeing prices as having gained strength from the buoyancy in values of rival row crops corn and soybeans, and in the strength of the renminbi, boosting the purchasing power of China, the top cotton importer.
Chinese price surge
Plexus Cotton too flagged that “the stronger yuan… has further added to China’s buying power.
“As a result, we have seen keen demand for more-attractively-priced foreign cotton and yarn,” for a Chinese market whose needs were evident in soaring domestic prices.
The January Zhengzhou cotton futures contract settled on Monday at 14,985 yuan a tonne – up 17.1% so far this month, and at 17-month closing high for a nearest-but-one lot.
The merchant noted too “strong demand for physical cotton in markets like Pakistan, India, Bangladesh, Vietnam and China”, which has “led to an increase in basis levels of various origins”.
