Asia Grain Outlook on Wednesday: Short covering may support prices

 

 

A large build-up in speculative short positions in recent months in grain futures is a cause of concern as it may support prices during the time of liquidation, trade participants said Wednesday.

 

They said global grain markets are under downward pressure from weak fundamentals but large portfolios of short positions can spark at least temporary gains.

 

"Earlier this month there was a small rally in futures prices due to short covering, despite ample supply in the physical market, and the same trend may recur again," said a Tokyo-based executive at a commodities brokerage.

 

Since early 2009 there has been a greater correlation in the direction of speculative positions of the three major grains markets--wheat, corn and soy, ANZ Banking Group said in a client note.

 

It said a huge short position has been built across the markets since the start of the year, and the worry is this could fuel a huge short covering rally at some stage if investors move to exit positions in unison.

 

"Wheat is particularly vulnerable because many investors are heavily short in the commodity," said a commodities trader in Singapore.

 

The May wheat futures contract on the Chicago Board of Trade ended down 9 1/2 cents, or 1.8%, at US$5.05 3/4 a bushel Tuesday.

 

However, it still isn't clear when there could be a surge in short covering. Some analysts said short covering was limited during the recent recovery in prices.

 

This potential short covering may take place after a further fall in prices and at that point risks will be huge, according to the ANZ report.

 

It said investors have continued to build short positions even though the markets have been falling.

 

The position duration for these investors is generally longer than has been the case so far. These positions have only been in place for just over a month. Earlier, they were built and held for 2-3 months.

 

Many buyers are staying away from the futures market because they lack confidence to set up long positions, said another Singapore-based commodities trader.

 

In the physical market, wheat exporters are vying with one another to cut prices while in corn and soy, due to lack of storage space in Brazil, there will be a large pressure on traders to release carryover stocks at lower prices.