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Hedge funds' ag sell-down longest in six years

Hedge funds' sell-down on agricultural commodities extended to the longest in more than six years as investors position for what many commentators expect to be a bearish 2014 for prices, undermined by inventory rebuilds.

Managed money, a proxy for speculators, reduced its net long position in futures and options in the major 13 US-traded agricultural commodities by 18,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission.

While still leaving themselves with a net long position the extent to which long bets, which profit when values rise, exceed short holdings which benefit when prices fall the decline was the seventh in a row.

That was the longest spree of bearish positioning by hedge funds on agricultural commodities since March-April 2007.

'New equilibrium'

The negative sentiment on hedge funds comes amid broad expectations of a poor performance for prices of many next year, after a strong US harvest this year, and benign weather in South America boding well for crops from corn to coffee in 2014.

Speculators' net longs in grains and oilseeds, Dec 10, (change on week)

Chicago soybeans: 162,905, (+11,827)

Chicago soymeal: 63,458, (+4,927)

Kansas wheat: 17,770, (-2,914)

Chicago soyoil: -41,716, (-5,762)

Chicago wheat: -69,461 (-5,448)

Chicago corn: -92,216, (+26,598)

Sources: Agrimoney.com, CFTC

Last week, Rabobank forecast a negative outlook in particular for soybean prices, although it did foresee gains in cocoa.

Morgan Stanley on Monday said that "surplus looks increasingly likely across the agriculture markets into 2014-15.

"After three years of weather disruptions, US and global agricultural production is poised to set new highs.

"Now prices must find a new equilibrium that adequately grows demand while discouraging additional global plantings in 2014-15."

'Not just liquidating'

The turn bearish has been particularly marked in New York-traded raw sugar, in which hedge funds slashed their net long position by 48,000 contracts in the latest week the biggest bearish shift in positioning on records going back to 2006.

Speculators' net longs in New York softs, Dec 10 (change on week)

Cocoa: 77,556, (-1,325)

Raw sugar: 25,117, (-48,372)

Cotton: 16,614, (+8,913)

Arabica coffee: -20,196, (-748)

Sources: Agrimoney.com, CFTC

Such positioning by hedge funds reflects ideas of a late-season flourish for the Brazilian cane harvest and decent output prospects for India and Thailand, ensuring ample supplies for the world market.

It is also down to active bearish positioning rather than an exit from long holdings, which were virtually stable over the week.

"Funds have been shorting the market, not just liquidating," Sucden Financial said, noting that open interest in sugar, the number of live contracts, rose by some 50,000 lots over the week.

"It's clearly going to get a little more technical now," with the change in positioning, the broker added, estimating funds' average in-price at "around maybe below 17 cents a pound".

'Hard to recommend being short'

However, funds also turned more negative on wheat, extending their net short position in Chicago futures and options to a record high of nearly 70,000 lots, amid a rise in ideas for world supplies kicked off by a Canadian crop upgrade.

Speculators' net longs in Chicago livestock, Dec 10, (change on week)

Live cattle: 90,208, (-934)

Lean hogs: 55,312, (-5,120)

Feeder cattle: 8,267, (+125)

Sources: Agrimoney.com, CFTC

"It is hard to recommend being short wheat with the market so oversold, but there really isn't anything to indicate we are done going down [in prices]," Jonathan Watters at Benson Quinn Commodities.

Futures have set a series of contract lows in all three major wheat markets, Chicago, Minneapolis and Kansas City.

Optimism over rising livestock prices has also reduced, with lean hog futures being undermined by a sharp rise in US pork production since early November, reflecting elevated slaughter weights, with live cattle futures sapped by raised expectations for US beef production next year.

Temporary support?

In corn, hedge funds continued to close their net short position, which hit a record 180,000 lots in late October.

However, it is unclear whether this reflects less dismal expectations for prices or a wish to take profits ahead of year-end, and an early 2014 index fund rebalancing expected to bring buying pressure.

In this exercise, early in the calendar year, funds adjust weightings to return individual commodities to the levels stipulated by the index they follow meaning buying 2013's poorest performers, and selling the winners

Sentiment in corn is also being increasingly undermined by China's rejection of some US cargoes of the grain on grounds of containing an unapproved genetically modified variety, a trend having a growing impact on other markets too.

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