Hedge funds 'have scope' to lift bullish soy bets

Hedge funds made a massive shift on agricultural commodity futures and options overall in the week to last Tuesday, lifting their net long position in the major 13 contracts by 138,947 lots, the highest since during the US drought scare last summer, data from the Commodity Futures Trading Commission regulator showed.

The shift meant that managed money, a proxy for speculators, turned in two weeks from its first net short position on record in agricultural commodities to a net long of more than 230,000 contracts.

The positioning by hedge funds was reflected in positioning in a number of agricultural commodities, including cotton, in which they raised their net long position to 82,715 lots, the highest since records began in 2006.

Tour findings

However, the change in sentiment was particularly evident in Chicago soybean futures and options, in which hedge funds hiked their net long position by more than 50,000 contracts, a figure beaten only once, in July 2010.

Such fears were given support by talk by scouts on the Pro Farmer tour of Midwest crops, which ended up forecasting a crop of 3.158bn bushels, on a yield of 41.8 bushels, below US Department of Agriculture expectations of 3.255bn bushels and 42.6 bushels per acre.

'Still only modest'

Nonetheless, with the net long position a little under 100,000 contracts as of last Tuesday, there was still scope for hedge funds to increase further their bullish positioning, Richard Feltes at Chicago-based broker RJ O'Brien said.

The CFTC data still show "only a modest managed fund soybean long", Mr Feltes said, well below a June high of 141,177 contracts, let alone the all-time high above 250,000 contracts set in May last year, and only marginally above the average net long, of some 94,000 contracts.

Such positioning implies considerable scope for hedge funds to increase their net long in soybean futures and options before reaching historical highs.

Indeed, hedge fund buying is seen as fuelling further gains in soybean futures on Monday, when Chicago's best-traded November contract soared 5% at one point to an 11-month high of $13.94 ¾ a bushel, as meteorologists forecast extreme heat for the Midwest, with little hope of rain relief.

Still net short

Speculators maintained among their most bearish positions on Chicago corn too as of last Tuesday, as nearly 92,000 lots, despite cutting their net short by more than 31,000 contracts.

The harvest was pegged at 13.46bn bushels, below the USDA figure of 13.763bn bushels.

Hedge funds made a modest covering of short positions in Chicago wheat, with ideas of harvests buoyant in some other major producing countries, such as Canada and France.

Crush for cattle

Their turn even more bullish in New York cotton futures and options appears a poor bet, given the fall of a further 4.5% in prices since, on improved ideas for the US crop.

In Chicago live cattle too, a ramp up in the net long position, by more than 13,000 contracts to 54,563 lots, the second highest of the year, preceded weaker prices.

However, cattle futures, particularly those for delivery beyond the spot August lot, received some support from data late on Friday showing cattle on feed at 10.026m head as of the start of the month, down 5.9% year on year.

Investors had expected a 4.2% decline.