Softs look the biggest winners among commodities of the fund rebalancing exercise, and are set for inflows of \$600m – although this will not necessarily mean higher prices, Morgan Stanley said.

Funds tracking the S&P GSCI and DJUBS indices today begin their annual rejig aimed at bringing portfolio weights to those of the index they follow, an exercise sparking the buying and selling of billions of dollars in commodities.

Largely, the rebalancing means selling last year's top performing commodities, rendered overweight by their gains, while buying up laggards.

However, the process is complicated by the changing by indices of base weightings, with the DJUBS index in particular instigating changes, introducing soymeal, for instance, while cutting back on soybean and soyoil.

This mean that funds are set to snap up more than 50,000 soymeal contracts, despite futures in the animal feed ingredient rising 36% last year to represent one of the top commodity performers.

At some \$2.1bn of value, soymeal ranks as a major winner of the rebalancing, second only to Brent crude, which will see some \$3.6bn of inflows, according to Morgan Stanley calculations.

Coffee and sugar purchases 

However, the grains and oilseed complex will also witness heavy sell-downs in soybeans and soyoil, and Chicago soft red winter wheat which, besides itself being a strong performer last year, and so in line for an index fund trim, is seeing its weighting slashed in the DJUBS index, in favour of Kansas hard red winter wheat.

"We expect the largest selling in the [grains and oilseeds] complex – we estimate \$1.3bn of outflows, most likely in the March contracts," Morgan Stanley said.

But "we expect the process to bring inflows of \$1.5bn to the softs," the bank said, thanks to their poor performance last year, and to increased weightings in the DJUBS index.

New York raw sugar, in which the DJUBS weighting is increasing to 3.9% from 3.0%, will be the biggest gainer among soft commodities in contract, 33,000, and value, \$664m, terms.

New York-traded arabica coffee will see a net inflow of \$616m.

'Murky impact'

Livestock will see \$872m of outflows, thanks to a cut in the DJUBS weightings for both live cattle and lean hogs.

However, even the extent of these cash flows did not mean that prices were necessarily fated to move accordingly, given the time markets have had to prepare for the rebalancing.

"The price impact of rebalancing is murky," Morgan Stanley said.

"While rebalancing will likely lead to some price action, if history is any guide, most of the impact is likely already priced.

"Despite an estimated \$3.2bn of inflows to natural gas in 2012, prices fell 11% during the rebalancing.

"While Brent gained material weighting last year, it actually fell during the rebalancing as European Union issues weighed, and only rose again on mounting Mideast tensions."

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