Hedge funds slashed their bullish bets on agricultural commodities to the lowest in nearly two years, as investors scrambled to the exits at one of their quickest paces on record.
Managed money, a proxy for speculators, cut by 167,620 contracts its net long in futures and options in the top 13 US-traded ags contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission shows.
The reduction shrank the net long – the extent to which long bet, which profit when prices rise, exceed short positions, which benefit when values fall – to 664,523 lots, the lowest since August 20.
The shift came in a week in which agricultural commodity prices sank by nearly 5%, undermined by broader market concerns over the likes of rising interest rates and economic growth, as well as by crop-specific factors such as pressure from the northern hemisphere winter crop harvest.
The change in hedge fund sentiment was reflected in the main in a retreat from long positions, with more than 130,000 contracts liquidated during the week – the biggest such withdrawal since March 2020.
The number of short bets rose by a more modest 36,831 lots – albeit enough to push the total above 400,000 contracts for the first time in seven months.
The liquidation trend was followed by other types of investor too, with commercial participants such as producers, mills and merchants retreating heavily from both long and short positions, in particular in grains.
Overall net interest, ie the number of live contracts, in ag futures and options plunged by more than 715,000 lots week on week – the third largest withdrawal for any week on data going back to 2006.
Among grains, both corn and soybeans suffered particularly sharp net selldowns by hedge funds, of 36,649 lots and 29,915 contracts respectively.
Although wheat selling was less significant in terms of contract numbers, it has now lasted for six successive weeks, shrinking the net long in hard red winter wheat to the smallest in nearly a year.
In New York-traded soft commodities, such as cocoa, coffee and cotton, managed money has also been a seller for six weeks in a row, cutting the net long in the complex below 140,000 lots for the first time since July 2020.
Hedge funds have proved particularly willing to place short bets on softs too, lifting the total to the highest also since July 2020.
Cotton suffered its biggest net selldown since March 2020, of more than 14,000 contracts, fuelling a slump of 17.9% in the best-traded December contract during the week to its lowest levels of 2022.
The selldown reflected “some late-June moisture along the Texas Gulf Coast… generally weak demand, weak US cotton export sales, and sub-par export shipments”, said Dr John Robinson at Texas A&M University.
Raw sugar also attracted strong net selling, of more than 45,000 contracts, termed “astonishing” by Marex, amid worries over a change in Brazilian fuel taxes, which has reduced the levy advantage that ethanol had over rival gasoline.
Brazil has cut to a uniform 17-18% VAT on gasoline, from state levels as high as 25% in Sao Paulo, while the tax on ethanol has stayed unchanged, at 13.3% in Sao Paulo.
Furthermore, it has scrapped federal taxes of R$686 per cubic metre on gasoline, and R$130.9 on ethanol.