Soybeans are harvested with a Case IH Agricultural Equipment Inc. combine harvester in Princeton, Illinois, U.S. (Photographer: Daniel Acker/Bloomberg)  

Hedge Funds Vindicated by Trade War Twists That Sank Soybeans

(Bloomberg) -- Hedge funds have never been this bearish on soybeans, a move that’s paying off as the market craters.

Futures posted their biggest weekly loss in more than eight months as optimism fades over a close-at-hand end to the U.S.-China spat. Trump has raised tariffs on some goods from the Asian country and threatened Beijing with an ultimatum: seal a deal in a month, or face duties on all exports. The hardening stance has traders worried that the 25% retaliatory tariffs American soy is facing aren’t going away anytime soon.

Making matters worse is the scourge of African swine fever that’s sweeping China. Half of the nation’s soy imports are used for pig feed. Farmers in the country have been forced to cull more than 1 million hogs, putting future demand into serious question. At the same time, the U.S. government predicts domestic soy inventories will climb to a record this year and stay near the high in the upcoming season. That all underscores why hedge funds have raised their bearish bets on the oilseed for four straight weeks, the longest streak since September.

“There’s going to be plenty of soybeans around in the world,” said Jack Scoville, an analyst at brokerage Price Futures Group. “If we don’t get a trade deal, we have a huge issue on our hands. Even if the Chinese come back and buy a lot of soybeans from us, their demand will be less because of African swine fever.”

Hedge Funds Vindicated by Trade War Twists That Sank Soybeans

On Friday, the U.S. Department of Agriculture said domestic soy inventories would be higher than analysts had predicted. The agency pegged 2019-20 inventories at 970 million bushels, the second-highest ever after a record 995 million in the current season.

Even then, the USDA is underestimating just how big the glut will get, according to Arlan Suderman, chief commodities economist at INTL FCStone. The firm expects stockpiles could reach 1.52 billion bushels.

“The USDA is still failing to acknowledge the significance of the African swine fever problem in China, and the implications that it will have on soybean demand for the remainder of this year, as well as the 2019-20” season, he said in a report.

As of May 7, investors held a net-short position of 160,553 futures and options in Chicago soybeans, U.S. Commodity Futures Trading Commission data showed Friday. The figure, which measures the difference between bets on a price increase and wagers on a decline, is the most negative since the data begins in 2006.

The move came as short-only holdings climbed by 6.4 percent to an all-time high of 220,453 contracts. Aggregate short and long positions are also at a record.

The extreme bearish sentiment may be one of the few things that can help the market eventually turnaround. If there were to be some unforeseen adverse weather during the U.S. growing season, some hedge funds could cash in their negative bets and cover shorts, driving a a price recovery.

What Bloomberg Intelligence Says

“Such negative sentiment may be just what farmers need for price recovery. Grain options’ implied volatility is the lowest for this period of the early growing season since 1994, indicating extreme complacency. Risks of a negative-related gamma rally are about as high as they get. A minor spark could be explosive.”
-- Mike McGlone, commodity analyst
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