Hedge funds took their most bearish stance in Chicago wheat in two years in the run-up to Russia’s blow to the Ukraine grain export deal, enhancing the vulnerability of futures to a price spike fuelled by short-covering.

Managed money, a proxy for speculators, was a net seller of 14,001 contracts in Chicago soft red winter wheat futures and options in the week to last Tuesday, GrainPriceNews analysis of Commodity Futures Trading Commission data shows.

That represented the biggest selldown in 15 months, and expanded hedge funds’ net short in the contract to 36,052 lots, the most since June 2020.

The expansion of the net short – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain – was spurred by factors including rainfall on dry US winter wheat crops, as well as hopes for a renewal of the corridor guaranteeing safe passage for Ukraine grain exports.

Terry Reilly at broker Futures International noted that wheat price falls early last week were fuelled by “positive sentiment that Russia will agree to extend the safe passage deal for Ukraine grain exports due to expire November 19”.

‘Prices could be sent sharply higher’

However, that optimism has been spoiled by Saturday’s news that Russia has withdrawn from the ongoing deal, alleging a Ukraine drone attack on its fleet docked in Crimea.

“Going short on wheat no longer looks such a good idea, in fact quite the opposite, meaning prices could be sent sharply higher as funds reverse their positions,” a UK grain trader told GrainPriceNews.

“Expect a run of short-covering to support prices,” leaving at a loss short positions recently taken out.

Chicago wheat futures leaped nearly 8% in early trading, before easing back to $8.78 ¼ a bushel as of 10:30 UK time (05:30 Chicago time), a gain of 5.9% on the day.

Corn vs cotton

By contrast, managed money proved a net buyer in Chicago corn in the week to last Tuesday, by 10,113 lots, as drought threatened Argentine sowings while pressure on prices from the US harvest eased as it reached 61% completion as of October 23.

In grains overall, hedge funds were net buyers of 38,437 contracts, driving their net long back above 500,000 lots.

In the main New York-traded soft commodities, however, speculators proved net sellers of 56,479 lots, reflecting increased bearish positioning in all four contracts – arabica coffee, cocoa, cotton and raw sugar.

Cotton – which as an industrial commodity has proved particularly vulnerable to waning world economic growth expectations – suffered an eighth successive week of selling, of 8,752 contracts.

That shrank the net long in the fibre to 13,280 lots, the lowest since June 2020.

Dr John Robinson, cotton marketing specialist at Texas A&M University, noted that US export sales of cotton “continued weak” while “US boll opening and harvest both progressed ahead of the historical pace, despite rains over several cotton producing states”.

Coffee, sugar selling

In raw sugar, hedge funds sold a net 22,071 lots, the most in three months, amid increasing expectations for output in India, where a decision is expected imminently too on an export quota.

According to Marex, a government announcement is “virtually certain” to come either later on Monday or on Tuesday, and come in at 6m tonnes, expiring in May, with tradable allowances for each mill.

In coffee, managed money followed up its record selldown of the previous week with further selling, this time of 9,024 contracts, shrinking the net long in arabica futures and options to 3,048 lots, the lowest since November 2020.

Selling has been encouraged by mounting expectations for the 2023 Brazilian arabica harvest, following a rain-boosted blossoming period.

Merchant Café Atlantica said that “fears about the decrease in consumption, the tightening of household budgets and the loss of purchasing power also support the maintenance of” a fall in prices, which on Friday touched a 15-month low of 167.75 cents a pound.