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Hedge funds' wheat gloom may 'fuel price revival'

The return, close to a record high, in hedge funds' bets on falling wheat values, coupled with cold fears could - ironically - fuel a revival in prices, which took aim at a third successive day of gains on US markets.

Managed money, a proxy for speculators, cut its net long position in futures and options in the major 13 US-traded agricultural commodities by nearly 40,000 contracts in the last week of 2013, data from the Commodity Futures Trading Commission regulator showed.

That represented a record 10th successive week of bearish positioning on agricultural commodities, and reflected a more negative take on all but two contracts New York cotton and Chicago live cattle.

Sentiment on cotton has revived with ideas that China will not slice, for now, the government stockpiling programme which has supported world prices, while live cattle values have been sent to record highs by the US cold snap.

'Wary of short-covering'

In Chicago wheat futures and options, hedge funds raised their net short position to 71,648 lots, back within 300 contracts of the record high set earlier last month.

Speculators' net longs in grains and oilseeds, Dec 31, (change on week)

Chicago soybeans: 136,683, (-29,040)

Chicago soymeal: 57,931, (-2,382)

Kansas wheat: 8,022, (-44)

Chicago soyoil: -46,649, (-2,639)

Chicago wheat: -71,468 (-1,636)

Chicago corn: -94,812, (-7,018)

Sources: Agrimoney.com, CFTC

However, the extent of the net short position - at a time when Chicago futures have already fallen more than 7% last month has raised ideas that the market is vulnerable to a jump in prices on any bullish surprises.

The round of US Department of Agriculture data on Friday, which will bring briefings on winter wheat seedings and grain stocks as well as the flagship monthly Wasde report, could be one spark for a surprise.

Although some revival in wheat prices on Friday and Monday may have "done enough to correct oversold conditions, the speculative sellers should be wary of additional short-covering", said Brian Henry at Benson Quinn Commodities.

"With the prospects of higher wheat feeding" in the September-to-November period turning up in Friday's stocks briefing, "I wouldn't be surprised to see some additional short covering".

'Extreme weather conditions'

Commerzbank flagged the US cold snap, which has seen a succession of local records broken, as a potential spark for short-covering.

Speculators' net longs in New York softs, Dec 31 (change on week)

Cocoa: 74,708, (-1,994)

Cotton: 43,288, (+5,733)

Arabica coffee: -8,417, (-853)

Raw sugar: -25,626, (-2,073)

Sources: Agrimoney.com, CFTC

"We expect this [the elevated net wheat shot position] to be corrected now that the market is worried about the supply of US wheat in 2014 in the face of the extreme weather conditions," the bank said.

Chicago futures for March on Tuesday overcame early weakness to stand 0.5% higher at $6.08  a bushel as of 09:15 local time (15:15 UK time).

Opinions differ as to the threat of the cold to wheat, given that seedlings in many areas are covered by a protective snow blanket.

Commodity Weather Group believes the freeze has reduced overall US winter wheat yield potential by just 1.3%.

However, weather service MDA says that "very cold temperatures are resulting in some notable winterkill in western Kansas, eastern Colorado and Nebraska wheat areas".

Record high

The cold weather has done a better job of boosting live cattle futures, which on Tuesday touched 137.225 cents a pound in Chicago for February delivery, setting a record high for a spot contract for the fifth successive session, and supporting speculators' more positive stance.

Speculators' net longs in Chicago livestock, Dec 31, (change on week)

Live cattle: 96,771, (+5,622)

Lean hogs: 40,840, (-3,118)

Feeder cattle: 9,613 (-163)

Sources: Agrimoney.com, CFTC

"Animals put on less weight at the extreme temperatures that are currently being experienced," Commerzbank said.

"What is more, transport to abattoirs is hampered by road traffic delays."

Speculators in the last week of 2013 raised their net long in live cattle futures and options to an eight-month high of 96,771 lots.

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