CHICAGO (Karen Braun is a Reuters market analyst. Views expressed are her own)
Last week, soft red winter (SRW) wheat futures traded on the Chicago Board of Trade had the strongest week since June 2015 with prices sharply higher and funds historically short.
SRW, the most actively traded U.S. wheat contract, is at 10-year lows following another bountiful global wheat harvest, but the market is still heavily short in futures and options.
According to Friday’s data from the Commodity Futures Trading Commission, hedge funds and other money managers cut their net short position in SRW futures and options by just over 16,000 contracts last week but maintain a large net short of 135,406 contracts (reut.rs/2eyniOf).
In the first week of October, funds had opened up their largest short SRW position in futures and options in over nine years, leaving the market susceptible to bouts of short covering by commodity funds and money managers. Such a rebound likely contributed to the $0.25 gain in the nearby contract from Monday’s open to Friday’s close.
Last week’s price strengthening owed mainly to a sharp $0.195 rise on Thursday, Oct. 13, which was the largest intraday rise since June 30, 2015.
However, despite last week’s round of short covering, funds and managed money are still historically net short by a wide margin, so the market may still be highly vulnerable to profit-taking on bearish bets in the coming weeks and months.
Since 2007, October has been relatively mixed in terms of fund positioning on SRW futures and options, but the average net position so far this month is 88,000 contracts shorter than the next shortest, 2014 (reut.rs/2eyqid9).
The nearby Kansas City Hard Red Winter (HRW) wheat contract finished up $0.1325 on the week, with Thursday’s $0.1675 gain its best day since April 20.
Hedge funds and money managers’ positions in HRW futures and options are unique because not only do the funds hold the largest outright short position since at least March 2007, but they also hold the largest outright long position since then(reut.rs/2eeX8Mf).
As a result, the net position is just 5,869 contracts on the short side, but even this is significant because historically in October, funds are net long in HRW futures and options, with the exception of last year where they were just over 8,000 contracts short on average (reut.rs/2dW82Yc).
Kansas City wheat futures are now trading at a slight discount to Chicago again, a trend that is relatively uncommon – particularly at this time of year – although it was observed to a significant extent in late 2015 (reut.rs/2eyo79p).
Market participants had already known the size of the U.S. wheat crop prior to last Wednesday’s set of reports from the U.S. Department of Agriculture – monthly supply and demand and crop production – but the agency’s adjustment to demand was perhaps promising to the wheat longs.
USDA boosted domestic wheat exports by 25 million bushels to 975 million bushels for the 2016/17 marketing year, which would be the largest annual volume in three years.
Low domestic prices and good milling characteristics have made U.S. wheat desirable, especially since there have been some quality slip-ups and shortages in some key wheat exporting nations despite another large global harvest.
France’s typical customers may be a particularly good source for U.S. wheat sellers as the West European country has harvested one of the worst soft wheat crops in 30 years. Farm office FranceAgriMer said last Thursday that total soft wheat exports would be down at least 9 million tonnes (331 million bushels) from last year in the current marketing year which began on July 1.
U.S. wheat sales so far in the 2016/17 marketing year have generally kept up with trade expectations, and actual shipments implied by weekly inspections are nearly 29 percent ahead of last year’s pace through Oct. 13.
Graphic- Money manager's long, short, and net positions in CBOT SRW wheat futures and options contracts reut.rs/2eyniOf
Graphic- Money manager's average October net position in CBOT SRW wheat futures and options contracts, 2007-2016 reut.rs/2eyqid9
Graphic- Money manager's long, short, and net positions in CBOT HRW wheat futures and options contracts reut.rs/2eeX8Mf
Graphic- Money manager's average October net position in CBOT HRW wheat futures and options contracts, 2007-2016 reut.rs/2dW82Yc
Graphic- Kansas City/Chicago (HRW/SRW) Wheat Spread, 2007-2016 reut.rs/2eyo79p
(Editing by Matthew Lewis)