The fund selling which skewered prices of many crops last month may yet face a second wave, as funds and investment banks square positions ahead of the year end.

Managed funds and other speculative investors in major US food commodity futures have slashed their net long exposure – that is the advantage of their hoard of long positions over the short bets which benefit when prices decline – by 25% from the record high a month ago, on Australia & New Zealand Bank calculations.

However, the remaining net longs, equivalent to 78m tonnes of crop, are still high by historical levels, and above the peak reached during the 2007-08 price spike.

That leaves the markets with "heightened potential for further withdrawal", the bank said, warning that price surges such as seen on Wednesday "could encourage further profit taking".

'Liquidation phase'

"Many funds and investment bank proprietary [trading] desks have December year ends and may now be looking to take profits before reinvesting again in 2011," the bank said.

The concerns were echoed by Justin Kelly, analyst at US broker EHedger, who said that November's "liquidation phase" - which saw corn lose 16% from early-month high to month low, while sugar tumbled 20% and cotton nearly 30% - could "extend out into the second week of December".

"Something else to consider is the susceptibility of volatile market swings during the holiday season as traders wrap up for the year," he added.

However, he forecast prices potentially rising from mid-month into next year, ahead of a slew of US Department of Agriculture reports which will set the tone for much of 2011.

Most at risk

ANZ raised futures in New York cotton, Chicago soyoil and Kansas wheat as most vulnerable to an end-year exit by traders, based on the proportions of hot money among total investor interest.

However, "this does not mean that other markets are not vulnerable", with levels of speculative interest in corn and soybeans, for example, still not too far below record levels.

"This leaves them very susceptible to a change in market sentiment."