Hedge funds have been wrongfooted by a rebound in lean hogs, building short bets to the highest in more than two years on the eve of a rally, and as a jump in Chinese prices is provoking ideas of further gains.

Managed money, a proxy for speculators, slashed its net long in futures and options in Chicago lean hogs by more than 18,000 lots in the week to last Tuesday, GrainPriceNews analysis of data from the Commodity Futures Trading Commission data shows.

Having sold a record selldown of 23,535 contracts the previous week, hedge funds have undertaken, by distance, their biggest shift negative on lean hogs for any fortnight on data going back to 2006.

The move has reflected not only a selldown in long bets, which profit when prices rise, but the building of gross short position of more than 36,000 contracts, the most since August 2020.

Broad selling

The selling has reflected in part the growing economic concerns which have undermined sentiment in many markets, with dollar-denominated assets facing too pressure from dollar strength, which makes them less affordable to buyers in other currencies.

Across the top 13 US-traded agricultural commodity contracts as a whole, from corn to cocoa, managed money cut its net long in the week to last Tuesday by 60,372 contracts, the most in three months.

Lean hogs have attracted particular selling thanks to a seasonal factor, with demand tailing off with the end of the so-called US summer “grilling season”, at a time of buoyant slaughter rates.

The pork cutout, the wholesale butchered pork carcass value, ended September at its lowest in six months.

‘Massive discount’

However, lean hog futures enjoyed a strong finish to last week, with the October contract, after on Tuesday setting an eight-month low for a spot contract, bouncing by 6.8% by the close on Friday.

The December contract gained 3.7%, with the February 2023 lot adding 3.5%.

The gains were attributed to ideas that the market had been heavily oversold – ideas enhanced by a discount of lean hog futures to the exchange’s cash market index of some $19 per hundredweight, compared with a five-year average of $2.03.

December hog futures were “trading at a massive discount to the cash market”, said ADM Investor Services, noting too that the US Department of Agriculture’s quarterly briefing on US hog herd dynamics, as released on September 29, “was bullish”.

“Hog numbers are well below expectations and below the low-end of trader expectations,” broker said, adding that “this was the ninth consecutive quarter of year-over-year declines in hog supply”, and that hogs held for slaughter, an indication of pork supplies ahead, were down 1.5% year on year.

Mexico, China

At Walsh Trading, Peter McGinn noted the support to US pork export prospects from “sustained strength of the Mexican peso, given the country’s strong demand for US hams”.

Furthermore, he noted ideas that “traders view the recent rebound in pork cutouts as renewed cash strength which should give some more support to the market”.

There is some speculation too of support from a 5.8% surge in January live hog futures in China on Monday, as trading reopened following the golden week holiday, even after the country’s National Development and Reform Commission on Sunday announced the release of a fifth batch of pork reserves.

Some believe China could turn to the US for pork. China’s pork import commitments (completed shipments and unfulfilled orders combined) from the US total 185,000 tonnes so far in 2022 – a drop of 51% year on year, on USDA data.

Soy selling

The selling in lean hogs spilled over into other livestock contracts too, with managed money net sellers of 19,139 contracts in Chicago live cattle futures and options in the week to last Tuesday, the most in seven months.

Soymeal, a major livestock feed ingredient, suffered too, with net selling of 13,845 contracts, the most in five months.

This in turn encouraged liquidation in soybeans, in which managed money was a net seller of 17,343 contracts, also reflecting a spree of pricing by Argentine farmers encouraged by an exchange rate concession, and by some improving idea of the US harvest.

The USDA is expected in Wednesday’s Wasde report to make a small upgrade to its estimate for this year’s domestic soybean yield.

Cotton selling, cocoa buying

Among New York-traded soft commodities, hedge funds were notable sellers in cotton, which as an industrial commodity is particularly sensitive to economic jitters.

Managed money was a net seller of 8,651 cotton contracts, driven by an expansion in the gross short position to 13,874 lots – the most since July 2020.

Dr John Robinson, cotton marketing expert at Texas A&M University, noted that recent official reports had shown “very light-to-moderate demand in inactive/slow physical trading” in the US, and “weak” export sales.

However, in cocoa, hedge funds proved net buyers of 11,195 contracts, as heavy rains promoted concerns over the spread of black pod disease in Ivory Coast, the world’s top producing country.