Hedge funds lifted their bullish bets on agricultural commodities to a two-month high, fuelled by concerns over the US corn crop, and by the quickest pace of buying in 16 months in arabica coffee.

Managed money, a proxy for speculators, lifted its net long in futures and options in the top 13 US-traded agricultural commodities by 67,695 lots in the week to last Tuesday, GrainPriceNews analysis of Commodity Futures Trading Commission data shows.

The buying lifted the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 678,975 contracts, the biggest since June, and representing a notable recovery from a low beneath 420,000 lots as of August 2.

Corn concerns

Chicago corn has been a notable beneficiary of the change in sentiment among hedge funds, which proved net buyers of a further 39,251 lots in the grain in the latest week.

That was the biggest buying spree in the grain in nine months, and was fuelled by mounting worries over deterioration in the US crop, as well as European Union corn, which has been particularly tested by dryness and heat.

The proportion of the US crop rated “good” or “excellent” by US Department of Agriculture scouts has fallen to its lowest since the drought year of 2012, with production worries further enhanced 10 days ago when one of the best respected Midwest crop tours forecast the yield well below official estimates.

The Pro Farmer Crop Tour pegged the US yield at 168.1 bushels per acre, below a USDA figure of 175.4 bushels per acre, and translating into production of 13.76bn bushels – more than 600m bushels fewer than the USDA has forecast.

‘High level of demand’

The main four New York-traded soft commodity contracts – arabica coffee, cocoa, cotton and raw sugar – have also attracted a rebuild in long bets, including a clean sweep of net buying across the contracts in the latest week for the first time since November.

Cotton drew a fourth successive week of net buying, as floods in Pakistan cut prospects for world production already undermined by drought damage to the crop in the US, which is expected to end 2022-23 with its tightest supplies in 98 years.

In raw sugar, managed money exited short positions, spurred by ideas of what Marex termed on Monday a “high level of demand in recent months”, evident in the white sugar premium over raw sugar, elevated cash values, and long line-ups of ships awaiting loading in Brazilian ports.

Signally, the spot October contract has moved to a premium over the second-in March lot “the first time in decades… that this has happened at this stage of the sugar cycle, so seems to show that something strange is going on”, Marex added.

Typically, sugar supplies have been largely rebuilt at this time of year, five months into the Brazilian Centre South crushing season, and with India’s cane harvest to come.

Arabica worries

However, it was arabica coffee futures and options which attracted the most buying among softs – of 12,172 contracts, the most in any week since April last year, as hedge funds snapped up long bets in the bean, fuelling a jump in prices to six-month highs.

Coffee prices have been supported in part by resilience in the real, which helps values of assets of which Brazil is a key exporter, and by – initially – a large number of futures contracts left open at first notice day for the September lot, hinting at sizeable demand for the thin supplies of exchange arabica stocks.

But commentators have stressed too early concerns over the 2023 Brazilian crop, after rains stimulated trees into flowering, only for dry weather to set in and provoke talk of blossoms aborting rather than setting and forming fruit to be harvested next year.

Investors have been “have been monitoring the early blooming that occurred in late August in most” major Brazilian arabica-growing regions, “and are aware of forecasts for low rainfall in early September”, said Cepea, the Sao Paulo-based research institute.

“Although not all crops bloomed, the flowers that opened may fall, which would, once again, limit supply next year,” after disappointing crops in 2021 and 2022.

‘Drastic decline’

Hedge funds also proved notably net buyers in cocoa futures and options in the latest week, by more than 10,000 lots, amid decreasing confidence in output from second-ranked producer Ghana, thanks to dry weather.

Indeed, the International Cocoa Organization last week slashed by 111,000 tonnes, to 689,000 tonnes, its estimate of the country’s output 2021-22, as ends this month.

“The drastic decline in Ghana’s cocoa production is the key driver of the current season’s global supply shortfall,” the ICCO said, as it raised by 56,000 tonnes, to 230,000 tonnes, its estimate for the world production deficit this season.

Cocoa producers proved substantial sellers of the bean in the week to last Tuesday, with the commercial gross short expanding by 7,636 lots in the week to last Tuesday, the biggest increase in nearly four months, separate CFTC data show.