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Hedge fund corn shorting spurs price spike fears

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The extent of the bets on falling prices that hedge funds have taken out on corn has spurred fears of a "fairly large short-covering rally", a broker warned, as futures in the grain extended a recovery from near-three-year lows.

Managed money, a proxy for speculators, raised its net short position in Chicago corn futures and options by more than 10,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

The increase, for a fourth successive week, took the net short position – the extent to which short bets, which profit when prices fall, outnumber long ones, which gain when values rise – to a record 123,221 lots.

It reflects the expectations of a record US crop, thanks to huge sowings and generally benign weather, which have indeed depressed prices, sending Chicago's best-traded December contract to $4.45 ¾ a bushel last week, its lowest since September 2010.

'Rather bullish information flow'

However, the extent of the short positions – which require corn purchases to close, so representing unfulfilled buying pressure – has raised concerns of a sharp upturn in prices, should a change in crop prospects, or better hopes for demand, improve price perceptions.

Speculators' net longs in grains and oilseeds, August 13, (change on week)

Chicago soybeans: 47,177, (+3,597)

Chicago soymeal: 25,795, (+2,422)

Kansas wheat: +9,597, (+7,732)

Chicago wheat: -43,996, (+3,339)

Chicago soyoil: -48,271, (+6,245)

Chicago corn: -123,221, (-10,149)

Sources: Agrimoney.com, CFTC

"We have had strong ethanol profitability, strong export sales of new crop corn," besides a "bullish" US Department of Agriculture Wasde crop report last Monday, which cut the forecast for the domestic corn yield.

"If the funds begin to liquidate their positions, it could cause a fairly large short-covering rally."

Corn futures in fact made a strong start to Monday, adding 1.7% to $4.71 ½ a bushel as of 06:00 Chicago time (12:00 UK time), extending nearly to 6% their revival from last week's low.

Net short closed

The increase in the net short positions in corn defied an otherwise more bullish turn in hedge fund positioning in the week to August 13, with the managed money lifting by more than 97,000 lots its net long in major US-traded agricultural commodities overall.

That shift, the biggest turn bullish since April, returned hedge funds to a net long position in agricultural commodities, after running up their first net short on record as of August 6.

Hedge funds trimmed their longstanding net short on Chicago wheat, and turn more positive on soybeans after the most savage three-week bearish shift in positioning in nearly two years.

'Laundry list'

However, it was soft commodities, which Societe Generale recommended last week as likely to show a better performance than grains, which enjoyed the strongest shift long in hedge fund positioning.

Speculators' net longs in New York softs, August 13, (change on week)

Cocoa: 52,416, (+7,758)Cotton: 79,292, (+15,846)Arabica coffee: -17,374, (+3,228)Raw sugar: -13,322, (+37,433)Sources: Agrimoney.com, CFTC

Mississippi State University rated the "laundry list" of price-supportive factors for cotton as the "continuation of the West Texas drought, continued growing problems in China, especially east China, and continued moisture problems in the south east US, and the US Midsouth".

In arabica coffee, speculators trimmed their net short position, after Brazil's government unveiled a support programme for growers struggling with prices near three-year lows.

Cocoa deficit concerns

Hedge funds raised their net long position in New York cocoa futures and options by more than 7,700 contracts to a five-year high of 52,416 lots, amid reports of disappointing pod development in the crop in Ivory Coast, the top producer of the bean.

Speculators' net longs in Chicago livestock, Aug 13, (change on week)

Lean hogs: 80,911, (+2,883)Live cattle: 40,932, (+17,450)Feeder cattle: 4,810, (-352)Sources: Agrimoney.com, CFTC

And in raw sugar futures and options, managed money cut its net short by more than 37,000 contracts – the biggest bullish shift in positioning in a year – to a five-month low of 13,322 lots, amid talk of frost damage to Brazilian cane.

'Bears are back in control'

However, the change in positioning - in reducing the extremity of the net short position and the chance for short-covering –was seen on Monday as potentially paving the way for hedge funds to turn more negative on prices again.

"The funds have reduced their short considerably over the last reporting week and have perhaps now put the knife to another fund-short-covering rally story/play," Sucden Financial said on Monday.

"The bears are back in control this morning," with New York raw sugar futures for October down 1.0% at 16.77 cents a pound.

By Agrimoney.com

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