Hedge funds turned bullish on agricultural commodities at the quickest pace in eight months, driven by expectations of a collapse in US cotton stocks, and by a short-covering spree in sugar.
Managed money, a proxy for speculators, hiked its net long position in futures and options in the top 13 US-traded agricultural commodities by 105,318 lots in the week to last Tuesday, GrainPriceNews analysis of data from the Commodity Futures Trading Commission shows.
That represented the largest weekly increase in the net long – the extent to which long bets, which profit when prices rise, exceed short positions, which benefit when values fall – since November.
And, while reflecting buying across the complex, from grains to livestock, purchasing was particularly strong in New York-traded soft commodities, which attracted net buying of more than 56,000 lots as funds exited short positions.
In cotton, managed money lifted its net long in New York futures and options by 11,694 lots, the most in 10 months, in a week which witnessed a cut of 600,000 bales to 1.80m bales in the forecast for US stocks of the fibre at the close of 2022-23, as revealed in the official monthly Wasde crop report.
That would be the smallest carryout inventory on data going back more than 60 years and indeed, according to the US Department of Agriculture, would show the “lowest stock-to-use ratio since 1924-25”.
The stocks-to-use ratio, in comparing inventories with demand, is a measure of the tightness of supplies, and viewed in markets as a key indicator of price potential.
At Texas A&M University, cotton marketing specialist Dr John Robinson said that the stocks downgrade – which reflected a “record” month-on-month downgrade to US cotton production expectations, of 2.93m bales – was “extremely bullish”, triggering a change in stance by funds.
“The speculative influences appear to have switched [out of] their six-week decline and reacted to the August Wasde surprise,” Dr Robinson said.
The buying – while met with the biggest producer selling in 10 months, of more than 19,000 contracts, separate CFTC data on commercial investors shows – fuelled an 18.0% surge in best-traded December cotton futures in the week to last Tuesday.
Speculators were even bigger net buyers in New York raw sugar, of 35,512 lots, which reflected overwhelmingly an exit from short bets, rather than the purchasing of long bets.
Indeed, managed money cut short positions by 28,041 lots, the second fastest pace for any week of the past two years.
The short-covering was attributed by traders in part to easing concerns over world economic growth, but also to waning expectations for world sugar production, as drought cuts European beet production hopes.
Late last week, Brazil cut its sugar production forecast, citing the lowest cane crop in 11 years.
‘Seems a little aggressive’
Among grains, hedge funds proved net buyers of Chicago wheat futures and options in the week to last Tuesday for the first time since May – ending the longest selling spree on data going back to 2006.
However, corn remained more in favour, with hedge funds raising their net long in Chicago by nearly 12,000 lots back above 150,000 contracts, spurred by decreasing expectations for the US yield, and drought which is, as with sugar beet, prompting downgrades to EU harvest forecasts.
For soybeans, hedge funds proved net sellers, of more than 2,000 lots. While the USDA, in its August 12 Wasde report, cut its forecast for the US corn yield by more than investors had forecast, the soybean yield estimate received an unexpected upgrade.
Some commentators remain surprised by the USDA’s soybean yield upgrade, to 51.9 bushels per acre, with Dr Michael Cordonnier, the respected crop analyst, saying that the revision “seems a little aggressive.
“Some of the farmer surveys could have been as much as two weeks old by the time we got the report last Friday.
“In that intervening period, it was basically dry in most of the western Corn Belt, so I think the crop has declined since the survey was conducted.”