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Hedge funds sweeter on ag prices, led by sugar

Hedge funds ended a run of bearish positioning on agricultural commodities as a massive switch in sugar exposure, towards bets on price rises, trumped further downbeat holding on grains.

Managed money, a proxy for speculators, raised its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to cattle, by approaching 55,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The return to raising the net long the extent to which long positions, which profit when prices rise, exceed short bets, which benefit when values fall broke a run of increased bearish positioning over the previous seven weeks.

And it was led by raw sugar, in which managed money raised its net long by nearly 80,000 contracts by far the biggest bullish switch in positioning on records going back to 2006.

Brazil, India concerns

The upbeat positioning - which helped raw sugar futures rise more than 4% over the week in New York and white sugar futures gain more than 3% in London to top the table of agricultural commodity gainers reflected growing concerns for sugar output in both Brazil and India.

Speculators' net longs in grains and oilseeds, Jun 24, (change on week)

Chicago corn: 115,176, (-22,104)

Chicago soymeal: 49,224, (-10,870)

Chicago soybeans: 41,221, (-5,403)

Kansas wheat: 24,949, (+205)

Chicago soyoil: 5,496, (+20,139)

Chicago wheat: -40,436, (-11,494)

Sources: Agrimoney.com, CFTC

In Brazil, the top sugar producing country, industry group Unica has repeatedly warned that data showing a decent start to 2014-15 for the cane harvest, and sugar production, will give way to softer numbers as mills are forced to use crop more severely damaged by persistent drought.

In India, the second-ranked sugar producer and biggest consumer, a weak start to the monsoon has spurred concerns over output.

"What seems to have occurred is that the monsoon which normally marshals its forces at the southern tip of the sub-continent, and then sweeps up the whole country, has been blocked by an area of high pressure and is creeping up the coasts, and thus missing out on the central areas, which include the main sugar area of Maharashtra," said London broker Marex Spectron.

"It is not expected to reach these areas until mid-July.

"In the meantime cane in these areas suffers stress from the heat and drought."

Hedge funds vs producers

The rise in the net long in sugar was driven both by an increase in hedge funds' gross long positions, to nearly 220,000 contracts, the highest in seven months, and a 45,000-drop in the gross short.

Speculators' net longs in New York softs, Jun 24, (change on week)

Raw sugar: 156,364, (+79,887)

Cocoa: 67,986, (-2,639)

Arabica coffee: 39,054, (+707)

Cotton: 24,702, (-562)

Sources: Agrimoney.com, CFTC

However, the high prices encouraged significant selling by sugar producers too.

"Commercial investors sold into the rally, increasing their net short position by 89,310 lots week on week to 329,900 lots," Rabobank noted. 

Downbeat on corn

Hedge funds also raised their net long positions in arabica coffee, amid revived concerns over the impact of Brazil's drought on output of the bean too, and in live cattle, following data showing a drop in the number of cattle on US feedlots last month.

Speculators' net longs in Chicago livestock, Jun 24 (change on week)

Live cattle: 127,647, (+3,247)

Lean hogs: 58,844, (+3,531)

Feeder cattle: 12,602, (-667)

Sources: Agrimoney.com, CFTC

The increases more than offset further downbeat positioning on grains, with the net long on corn futures and options falling for a seventh successive week the longest such spree since autumn 2008.

Corn prices have been depressed over the past two months amid increased hopes for the US crop, viewed by many as on track to set a further record high this year.

While excessive moisture is presenting a challenge to output in some northerly parts of the US, in others, overall, the lack of any sign of unduly hot weather for the forthcoming pollination period is seen as a large positive factor.

'Quality issues, specifically vomitoxin'

In Chicago-traded soft red winter wheat, moisture is seen as a negative, in boosting disease threats to a now-mature crop.

Broker CHS Hedging said: "Quality issues, specifically vomitoxin, continue to cause problems with the soft red winter wheat harvest in the east."

However, this period remains a difficult one for wheat futures to stage much of a rally, with harvest time encouraging producer selling and bringing a ramp up supplies for buyers to choose from.

Hedge funds raised their net long in Chicago wheat by 11,494 lots above 40,000 contracts, a four-month high, but still below the January net short above 73,000 contracts.

The data also showed a large increase in the net long position in soyoil, reflecting a mass closure of short soyoil-long soymeal spreads.

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