Agricultural commodities are no longer overbought.

But they are undersold, in managed money terms, analysis by GrainPriceNews suggests.

This means we may well yet be in for more of the kind of volatility which has marked the start of July.

Not so long

Sure, it is considerable succour to agricultural commodity bulls that hedge funds have wound down their excessive purchases in the sector.

In the aftermath of the Ukraine war, and the blow that dealt to supply hopes for the likes of corn, oilseeds and wheat, and with US spring sowings making a slow start, they built up their long position in futures and options in the top 13 US-traded ag contracts to a near-record 1.53m lots, as of mid-April.

That has been since wound down by more than 500,000 lots after US plantings caught up and fears of an ag supply squeeze eased a touch, in part down to mounting concerns for economic growth, with higher interest rates also stemming the flows of easy money.

A strong dollar, at its highest since 2002, also cuts the affordability of dollar-denominated assets.

In dipping to 1.01m lots as of last Tuesday, the managed money net long in fact fell below its long-term (ie on data going back to 2006) average, of 1.05m lots. So in this measure at least, ags are not overbought.

Undershorted?

But as far as short bets go, hedge funds have plenty of scope for piling in.

As of Tuesday, they held a little under 500,000 short positions in the top US-traded ags – well shy of the long-term average of 616,175 lots, let alone the record of nearly 1.75m lots set in 2019.

So they have plenty of scope yet for adding short bets before looking greedy on this score.

This even after taking out an extra 75,000 short positions in the latest week, the biggest such shift for any week since May 2020 – and fuelling a 9% slide over the period in ag prices, as measured by the Bcom ag subindex.

More shorts?

The question is whether funds will be motivated to take on further short positions.

They have certainly, in the short-term, been given scope for second thoughts, with the Bcom ag having rebounded by 6.4% since last Tuesday, putting many of these latest short bets under water.

A turn hotter in the US Midwest weather outlook has sent investors marking down their corn yield forecasts again.

But there will be periods ahead when more benevolent weather and waning demand hopes will encourage a fresh clamour for short bets, especially if raised Covid cases force renewed lockdowns in China, a key consumer and importer of a range of commodities, including ags.

Expect occasional short-gorging sprees yet by funds, especially with the tailwind of northern hemisphere grains harvest (and eg Brazil’s coffee harvest) to keep some pressure on prices.

Stairs vs elevator

Investors say that while ag rallies are often rose relatively gradually, they tend to fall precipitously – or “climb the stairs and fall by elevator” as the adage goes.

There will likely be more lurches lower by elevator ahead – although with Black Sea supply concerns, La Nina fears and the potential for the end of the northern hemisphere harvest, these should not be overplayed.

But there will be limits too. The latest sell-off by funds was met with hefty buying by commercial interests, such as mills, bakers, roasters and grinders, who are likely to continue to make the most of opportunities to get cover at weakened prices.