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Fund sell-down 'boosts prospects' for grain rally
By Agrimoney.com - Published 14/01/2013

Hedge funds cut their net long position in Chicago corn and soybean futures to multi-month lows heading towards the US downgrade of its inventories of the grains, raising ideas of a rebound in values gaining an extra gear.

Managed money, a proxy for speculators, cut its net long position in Chicago soybean futures and options by nearly 27,000 contracts in the first week of January, data from the US Commodity Futures Trading Commission said.

The cut in the net long position - the advantage of long bets which gain when prices rise over short bets which gain when values fall took it to an 11-month low, and meant it stands at less than 30% of the size it was at its high in May last year, following poor South American harvests.

Sell-downs

For Chicago corn, the net long position dropped by 20,793 lots to 115,113 contracts, the lowest since late June, before US weather fears kicked in, driving futures sharply higher.

Speculators' net longs in grains and oilseeds, Jan 8, (change on week)

Chicago corn: 115,113, (-20,793)

Chicago soybeans: 73,252 (-26,698)

Chicago soymeal: 36,188, (-2,147)

Kansas wheat: 16,880, (-4,948)

Chicago wheat: -17,835, (+1,316)

Chicago soyoil: -37,016, (+4,584)

Sources: Agrimoney.com, CFTC

The net long position in corn is two two-thirds down on a high in August, the month Chicago futures hit their record high of $8.43 a bushel.

While speculators turned slightly more positive on Chicago wheat, managed money remained net short, by nearly 18,000 contracts, meaning more investors expect falling than rising prices.

The small level of short-covering contrasted with a cut of nearly 5,000 contracts, to 16,880 lots, in the net long position in Kansas hard red winter wheat futures and options.

Chicago vs Kansas

The swing towards Chicago wheat appears at odds with the switch in positioning expected from the ongoing index fund rebalancing process, in which funds following the DJ UBS index are expected, on Morgan Stanley estimates, to cut 52,700 Chicago soft red winter wheat lots, and buy more than 26,000 Kansas wheat ones.

Some precipitation in US hard red winter wheat country, where seedlings are struggling against drought, has eased concerns for the crop, which entered dormancy in its worst-ever condition.

However, it appears to have left investors poorly-positioned for Friday's slew of US Department of Agriculture data which showed seedings of hard red winter wheat falling by more than 700,000 acres to more than 1.0m acres below investor estimates.

While the estimate for soft red winter wheat plantings was a little higher than expected, at 9.4m acres, supply hopes for the variety took a cut with the USDA raising its estimate for consumption in 2012-13.

'Wrong-footed a bit'

Indeed, speculators "seem to have been wrong-footed a bit" by Friday's USDA data deemed, for grains at least, bullish, a UK grain trader told Agrimoney.com.

Speculators' net longs in New York softs, Jan 8, (change on week)

Cocoa: 24,396, (-6,845)

Cotton: 22,927, (-5,894)

Raw sugar: 12,921, (-12,575)

Coffee: -22,321, (+832)

Sources: Agrimoney.com, CFTC

"For investors hoping for a rebound in grain prices, the degree of fund sell-downs has only exacerbated the likelihood of a rise," the trader said."It looks like speculators have been putting all their money into shares, but maybe they should have waited a little."

The fund sale co-incides with a rush of cash into equities , with investors last week putting a net $22.5bn into equity funds, the most for any week since September 2007, according to EPFR, a funds research company.

'Largest error since 2007'

Nonetheless, Richard Feltes at RJ O'Brien flagged the impact of the fund sell-downs in corn given the extent to which investors overestimated US inventories in the run up to Friday's data.

"The trade overstatement of US December 1 corn stocks by 253m bushels is the largest error since 2007 and the third largest trade overstatement in our database," he said. 

"An error of this magnitude is particularly noteworthy given already tight old crop stocks, the degree to which managed funds have liquidated corn longs and the extent to which corn end user forward coverage has dwindled in hopes of a bearish January crop report."

However, he also flagged the potential for further fund sell-downs if the rally sparked by Friday's USDA data does not meet technical targets.

"Whether or not March corn futures can clear the mid-November highs at $7.63 a bushel remains to be seen although failure to do so would likely trigger more fund liquidation," he said.

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