Hedge funds are being caught out by a recovery in New York-traded soft commodities, building their biggest net short in the complex for more than two years, only for prices of most contracts to stage a recovery.

Managed money, a proxy for speculators, proved a net seller of the top New York-traded softs – arabica coffee, cocoa, cotton and raw sugar – by 67,430 lots ( futures and options combined) in the week to last Tuesday, GrainPrice analysis of Commodity Trading Commission data shows.

That unusually large selldown, the second largest of the year, took the position into a net short of 4,629 lots – the extent to which short holdings, which profit when values fall, exceed long bets, which benefit when prices gain.

That was the largest net short since June 2020, when markets were emerging from the depths of the Covid crisis.

Coffee stabilises

However, funds’ negative positioning has been rewarded by price falls in only one of the four contracts, arabica coffee, which for December futures stood on Monday at 171.85 cents a pound, down by 1.6% from their close last Tuesday.

That said, futures remained 2.4% above a 15-month low reached on October 28.

Arabica prices have been undermined by improved confidence in Brazilian harvest prospects for 2023, after a rain-blessed blossoming period, with a surge in levels of coffee pending approval for delivery against futures boosting hopes for shorter-term supplies.

By contrast, the December New York cocoa contract stood on Monday at $2,448 per tonne, up by 4.3% since last Tuesday’s close, and close to a five-month high.

Quarterly cocoa grind reports “showed strong demand”, Jack Scoville at Price Futures noted, with combined Asian, European and North American volumes for the July-to-September period reaching a record high of 720,003 tonnes.

Further squeeze ahead?

Cotton futures for December have rocketed by 12.7% since Tuesday, rebounding in “dramatic fashion”, said Dr John Robinson, cotton marketing expert at Texas A&M University, who attributed the recovery indeed largely to hedge funds exiting short bets – which had risen to a two-year high.

“The explanation for [last week’s] price action is short-covering,” Dr Robinson said.

A combination of improved economic news from China, the top cotton importer, “technical buy signals, and limit-up market reactions induced speculative shorts to buy back their positions”, he said, foreseeing the potential for further such short-covering.

With November 23 bringing first notice for December cotton futures, and the start of the expiry process which gives contracts physical commitments, “any remaining discrepancy between undervalued cotton futures relative to cash cotton prices should be eliminated.

“The result is that remaining speculative shorts may get squeezed as they try to exit their position.”

‘Practically zero stocks’

In raw sugar, in which managed money was a net seller of 40,923 lots in the week to last Tuesday, the shift heralded a more modest gain in prices, of 1.0% for the March futures contract, to 18.62 cents a pound at the time of writing.

Nonetheless, this represents a 6.1% recovery from an October 28 low, with the revival viewed by Marex as down to a “sudden spurt in cash values” which in turn “may have been caused by a recent flurry of raw sugar physical demand”, from the likes of Bangladesh, Egypt and Indonesia.

The lingering premium of near-term over distant futures contracts “confirms that we start the new [2022-23] sugar year with practically zero stocks.

“Demand has been underestimated.”

Soy in demand

The selling in soft commodities contrasted with buying in grains and oilseeds, in which hedge funds were net purchasers of 43,533 contracts during the week, driving their net long in the complex to a four-month high of 553,083 contracts.

Soybean futures and options proved particularly popular, attracting net buying of nearly 26,000 contracts, the most in nine months, helped by firmness in soyoil prices, which in turn have been boosted by factors including a slowdown in Argentina’s crush and plans by Brazil to raise biodiesel blending rates.

In soyoil itself, hedge funds in the week to Tuesday lifted their net long above 100,000 contracts for the first time in 19 months.