Hedge funds rediscovered an appetite for short bets on agricultural commodities, heaping record sell positions on cocoa, as they slashed their bullish betting on sector to the lowest in nearly two years.

Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded ags, from cocoa to lean hogs, by nearly 150,000 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission said.

The cut shrank the net long – the extent to which long bets, which benefit when prices rise, exceed short positions, which profit when values fall – to its smallest since August 2020.

And it reflected an enhanced willingness to bet on falling prices, by placing short bets, rather than just cash in long positions.

The number of short bets rose by nearly 75,000 lots week on week, the biggest shorting spree since May 2020.

Record chocolate short

Corn attracted particular attention, with managed money raising its short bets on the grain by more than 25,000 lots as Midwest rains boosted hopes for the US yield this year, while economic worries undermined demand ideas, and indeed encouraged investor selling across many markets.

Indeed, the Bcom commodities index shed nearly 9% in the week to Tuesday, helped by a 13% slump in Brent crude, which is a particularly important influence on ags, such as corn or sugar, linked to biofuel markets.

Investors raised their short bets on New York raw sugar futures and options above 90,000 lots for the first time in two years.

They also lifted short bets in New York cocoa above 90,000 lots for the first time on data going back to 2006, fuelling a decline in futures prices to a near-one-year low.

Chocolate consumption, which is to a great extent reliant on impulse purchases at the likes of airports and railway stations, is also viewed as vulnerable to economic growth concerns.

‘Probably overshot’

However, there were some signs of trade consumers taking advantage of the lower prices, with separate CFTC data showing commercial users, such as feed mills and ethanol producers, snapping up more than 25,000 corn lots, the third-ranked buying week in the past year.

For cocoa, trade users, such as confectionery groups, bought more than 12,000 lots to take their gross long position to 128,000 lots, the highest since September 2019.

And some commentators raised ideas too that the rapidity of hedge fund selling could herald buying pressure.

Marex, noting that funds “have been getting out of everything”, said that “they usually get out quicker than they get back in”.

However, “the ‘exit from everything’ has been too fast, and has probably overshot”, the broker said, adding that the story of ag market tightness “has not gone away, insofar as supply of most staple foodstuffs is still very tight”.

Bcom bounce

Ag prices indeed rose in early deals on Monday, with the Bcom ag subindex standing 1.4% higher.

The Bcom, having tumbled by 9.0% in the week to last Tuesday, has recovered by 7.7% since.