Monday, June 24, 2013

Hedge funds turn negative on ags, as US fears wane

by Agrimoney.com

Hedge funds turned negative on agricultural commodity prices for the first time in a month as improved US weather eased fears for corn and soybean crops, swamping a positive turn on cotton -which appears to have been a losing bet.

Managed money, a proxy for speculators, cut its net long position in futures and options in major US-traded agricultural commodities by nearly 32,000 contracts in the week to last Tuesday, according to the Commodity Futures Trading Commission, the market regulator.

Only in three out of the 13 main farm commodities - New York-traded cotton, and raw sugar and Chicago-traded lean hogs – did they turn more positive on price prospects.

And turning more negative on values has since proven, largely, to be a winning bet since, with commodities among assets hit by comments from Federal Reserve chairman Ben Bernanke last week over the withdrawal of ultra-easy US monetary policy, besides by soft Chinese manufacturing data.

'Nearly ideal weather'

Grain and oilseed prices have also been undermined by an improvement in the US weather, with the excess moisture still slowing late sowings seen as, broadly a boost to crops in the ground, and with weather models backing away from the prospect of imminent, excessive heat for the Midwest.

At Phillip Futures, Joyce Liu flagged the impact of "improving 2013 US corn crop prospects and weaker cash corn markets" on lowering prices of the grain, adding that "nearly ideal weather for developing crops" is expected in the Midwest over the next two weeks.

Soybean development too "is expected to improve as hotter and drier conditions emerge after a cool and wet spring", she said.

Paul Georgy, at Illinois-based broker Allendale, Paul Georgy, said that "wider-than-expected coverage of rain" across the Midwest over the weekend, "with warm temperatures to follow has traders convinced that 'rain is making grain'".

'Excessive rain'

"However, some areas received excessive amounts of rain over the weekend," Mr Georgy added.

North Dakota, as well as Canada, major spring wheat areas, have received excessive rainfalls, causing floods in Alberta which is forcing more than 100,000 people to flee their homes, besides prompting fertilizer group CF Industries to shut temporarily its Medicine Hat nitrogen plant.

Indeed, with wheat markets supported by ideas of Chinese buying too, beyond a 200,000-tonne order reported in France, the grain was one in which hedge funds were initially caught out by a shift to more negative positioning, with prices rebounding sharply on June 19.

However, values have continued to ease back since, depressed by the weight of supplies thrown off by the northern hemisphere harvest, and by the fall in prices of rival grain corn.

Cotton setback

Hedge funds' decision in cotton to ramp up to a historically-high 63,229 lots their net long position – the level to which long bets, which profit when prices rise, exceed short holdings, which benefit when values fall – has also proven of doubtful profitability.

While values of the thinly-traded old crop July contract are marginally higher than those on Tuesday, those of the December contract are nearly 3% down, undermined by rains which have improved crop prospects in Texas, the top US cotton-producing state, and soft imports by China.

"Fibres, owing to their discretionary demand attributes, are more susceptible to slowing economic growth than most other ag commodities," Luke Mathews at Commonwealth Bank of Australia said.

"Cotton markets are also being hurt by slower Chinese imports," which in May fell 31% year on year to 346,000 tonnes.

Profitability debate

The data come amid a debate over the extent to which agricultural commodities have lost appeal for hedge funds, with Ann Berg, a former Chicago Board of Trade director, warning over signs of a retreat.

Last week, Morgan Stanley revealed it was to close its agricultural commodities operation.

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