Huge hedge fund wheat bets 'limit price downside'

23rd Sept 2013

The extent of hedge funds' negative positioning on wheat has got so large that it may limit their appetite for more, brokers warned, even as prices outperformed those of fellow grains.

Managed money, a proxy for speculators, reduced its net long position in futures and options in the main 13 US-traded agricultural commodities by nearly 29,000 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The reduction came despite a continued and dramatic rebuilding by hedge funds of a net long position in raw sugar futures and options, and an increase in their record bets on rising lean hog prices.

However, in grains, hedge funds extended positioning for falling prices to levels which – in Chicago wheat – approached historic highs, ringing alarm bells over the potential for further short bets.

Record harvest

Indeed, hedge funds raised their net short – the level to which short bets, which profit when values fall, exceed long holdings, which benefit when prices rise – to 50,882 contracts, a level beaten only twice on records going back to 2006.

The positioning came in the week following a US Department of Agriculture upgrade, in its monthly Wasde crop report, by 3.5m tonnes, to a record 708.9m tonnes, in its forecast for world wheat production in 2013-14, with the forecast for end-season inventories raised by 3.3m tonnes to 176.3m tonnes.

Higher supplies, in meaning less need for buyers to compete, signal lower prices.

Furthermore, hedge funds continued to nudge higher their net long on soybeans, for which the Wasde was deemed more positive for prices, cutting US yield and end-stocks estimates.

Long bets in soybeans are often balanced against short positions in grains.

'Take some courage'

However, wheat markets have proved relatively resilient in recent sessions, against a backdrop of concerns about the quality of Black Sea harvests, with late rains seen as threatening a reduction in milling specifications, while the Argentine crop is taxed by dry weather.

Furthermore, demand for US wheat has proved strong at recent prices, with latest weekly data showing the US making export sales of more than 700,000 tones and actual shipments of 1.2m tonnes, the biggest in 23 years.

Establishing new short positions in Chicago wheat "would take some courage", Brian Henry at broker Benson Quinn Commodities said.

Commerzbank said: "The lion's share of the bearish news should be priced in, which should limit any further downside potential for wheat prices."

Wheat v corn

However, one other technical extreme that is grabbing investors' attention is the relative price of the grain to corn, with wheat's premium returning close to the $2-a-bushel a level which sparked selling early last month.

Wheat for December stood at $6.47 ¾ a bushel at 06:30 Chicago time (12:30 UK time), when December corn stood at $4.49 ¼ a bushel.

Sentiment in corn has been dented by stronger-than-expected yields from the US harvest.

Hedge funds in the week to last Tuesday raised their net short by nearly 40,000 contracts to a historically high 104,211 lots.

Cocoa concerns

Among soft commodities, hedge funds increased their net long position in cocoa to a record high 67,946 contracts.

Concerns over weather in the key West African producing region, at a time of reviving demand, have continued to spur bullish comment on the bean from the likes of Macquarie and Marex Spectron.

And speculators hiked their net long position in raw sugar too, by 25,795 contracts, taking to more than 75,000 lots in two weeks their bullish swing in net positioning on the sweetener.

Prices have been boosted by ideas that demand has been stronger than thought, while wet weather has slowed the cane harvest in Brazil's key Centre South, with further price gains made since Tuesday after the Federal Reserve's surprise move to stick with emergency economic support weakened the dollar, including against Brazil's real.

Hog bets

Hedge funds extended their record net long in Chicago lean hog futures and options too, as a drop in hog slaughter raised concerns about a shortage of supplies which could support prices.

Total hog slaughter in federally Inspected facilities for the week ending September 13 was, at 2.172m head, down 10.5% compared to a year before.