PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 10:34 UK, 15th Apr 2013, by Mike Verdin
Hedge funds' gloom on ags reaches record high

Hedge funds have taken their most bearish view on agricultural commodities on record, despite northern hemisphere weather setbacks testing expectations of sharp recoveries in output of key products this year.

Managed money, a proxy for speculators, cut its net long in futures and options in the major 13 US-traded agricultural commodities below 60,000 contracts as of last Tuesday, calculations of regulatory data show.

That took the net long position below the previous low, on data going back to 2006, of 72,000 contracts, reached in September that year.

And it came despite cold weather in the northern hemisphere, which has raised concerns over delayed harvests and potentially yield losses in a range of countries, from Canada to Ukraine.

In the US itself, late frosts, set to continue this week, have raised concerns over damage to southern winter wheat crops which, having emerged from dormancy, are more vulnerable to cold.

Balancing act

However, accompanying precipitation, while slowing spring crop plantings, is reducing drought concerns.

Speculators' net longs in grains and oilseeds, April 9, (change on week)

Chicago corn: 50,977, (-43,338)

Chicago soybeans: 62,600, (-14,615)

Chicago soymeal: 16,421, (-10,832)

Kansas wheat: 4,199, (+1,754)

Chicago wheat: -22,094, (+12,932)

Chicago soyoil: -43,210, (-9,921)

Sources:, CFTC

"Rainfall in key corn growing areas in the US is causing the market to fluctuate between fears of delays to planting on the one hand and an anticipated alleviation of the drought conditions on the other," Commerzbank said on Monday.

"This morning, there are overwhelming hopes that this year's 97.3m acres of corn," as forecast by the US Department of Agriculture, and the highest since the 1930s, "will indeed result in a record harvest."

Many analysts are forecasting a recovery of 30% or more in US corn production from last year's drought-reduced harvest, and a tripling above 2bn bushels in inventories at the close of 2013-14 implying lower prices, which the USDA foresees falling some 30% to $4.80 a bushel to farmers.

Risk-on, risk-off fading

Further pressing prices is the expectation of strong harvests in South America both of those currently being reaped, and the cane, coffee and safrinha corn crops to come.

Speculators' net longs in New York softs, Apr 9 (change on week)

Cotton: 57,117, (-11,067)

Cocoa: 13,065, (+2,004)

Arabica coffee: -23,557, (+3,292)

Raw sugar: -83,340, (-4,270)

Sources:, CFTC

"We expect corn and soybean prices to continue to weigh on the agriculture sector as South American harvests a record crop," Societe Generale analyst Jeremy Friesen said.

Be termed the decline in ag prices the "most striking" reflection of a return by commodity markets to moving in line with supply and demand fundamentals, rather than in tune with other risk assets, such as shares.

"A normalising of commodity markets is also starting to be evidenced through weakening cross-correlation of commodities," Mr Friesen said.

"More importantly, this is also seen with the falling correlation between commodity sectors and equity markets, reviving the traditional diversification strength of commodity investing."

Sour on sugar

The extent of hedge funds' bearishness has been reflected in particularly in New York-traded raw sugar, in which their bet short position hit a record 83,340 lots as of last Tuesday.

Speculators' net longs in Chicago livestock, Apr 9, (change on week)

Live cattle: 25,548, (+16,160)

Lean hogs: +2,967, (+14,413)

Feeder cattle: -753, (+1,838)

Sources:, CFTC

Sentiment has been sapped by the start of what is expected to be a huge harvest of cane in Brazil, the top producing country, although rain delays have fostered a recovery of more than 3% in New York's May contract from a two-year low hit two weeks ago.

However, speculators hold a relatively low net long position in Chicago corn too, the lowest since June last year, with the net long in soybeans at a 14-month low.

In Chicago wheat, managed money held a net short meaning short bets, which profit when values fall, outnumber long holdings, which gain when prices rise although at 22,000, it was well below February highs, a sign of the concerns over winter wheat damage.

Bullish signal?

Indeed, extreme positioning by hedge funds often sparks some reversal, for fear that the extent of the long or short bets implies limited scope for further such holdings.

Historically, low levels of speculator net long positioning in agricultural commodities have often been followed by swift recoveries - fuelling price rebounds.

In 2009, the net long recovered from 86,000 lots in March to more than 680,000 contracts in June.

In 2006, a net long of 72,000 contract reached in September preceded a rebound to more than 500,000 contracts in November.

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