by Agrimoney.com
Hedge funds, having avoided a second drubbing at the hands of US grain stocks numbers, face heavy losses if forecasts hold of worrying heat for Midwest crops, having extended short positions on corn to a record high.
Managed money, a proxy for speculators, slashed its net long position in futures and options in the major US-traded agricultural commodities by 134,000 contracts in the week to July 2, according to analysis of data from the Commodities Futures Trading Commission, the regulatory authority.
The shift in sentiment cut the net long position below 175,000 contracts, the lowest since April, the month when hedge fund sentiment towards agricultural commodities fell to its lowest ebb on record, with a figure of less than 60,000 lots.
On average, hedge funds have kept a net long of some 570,000 contracts, the CFTC data, going back seven years, show.
Cocoa selldown
The reduction in the latest week reflects in part a further cut in bullish exposure to cocoa, in which managed money cut its net long position for a third successive week, this time by more than 4,500 lots to take the total below 36,000 lots for the first time since April.
(Net long positions mean that long holdings, which benefit when prices rise, exceed short bets which profit when values fall.)
Sentiment on cocoa has been curtailed by expectations of selling to come by Ivory Coast and Ghana, although prices managed some rebound last week on concerns that Ivory Coast, the top growing country, plans to diversify the economy away from its reliance on the bean.
Investors trimmed their net long exposure to cotton too, reflecting macroeconomic concerns, and the impact of tighter US monetary policy.
Cotton, as an industrial commodity, tends to move more in line with broader markets than other agricultural commodities.
Bearish calls
However, hedge funds main bearish calls came in soybeans, wheat and, in particular, corn futures and options, which they slashed their net long position by more than 90,000 contracts for only the third time on record.
The reduction left speculators with a net short in Chicago corn for the first time since April 2010, and by the biggest amount, of nearly 20,000 lots, since February 2009.
The gross short position, at 238,446 contracts, was the largest on record.
And this had appeared a winning bet as of Friday, when December futures, the best-traded contract, touched $4.89 ¾ a bushel, the lowest level since 2010, weakened by mounting hopes for this year's crop underpinned by strong sowings.
The US Department of Agriculture stunned investors on June 28 by revealing that US growers planted 97.4m acres of corn - 2.1m acres more than expected by analysts, who had foreseen significant setbacks thanks to an unusually wet spring in the Midwest.
The turn net short represented "a significant change in the fact that the investment community may no longer be supporting this market unless more bullish information comes to the market such as a change in the weather pattern", one US broker said.
'May have legs'
However, just such an outcome arrived on markets late on Friday, when weather models first began indicate the potential for a US heatwave, signals which have gathered strength this week.
Corn futures for December recovered to stand at $5.07 a bushel on Tuesday, up more than 3% from Friday's low, and exposing hedge funds to the threat of losses on short positions.
The rally, which "may have legs if subsequent weather model updates confirm a drier trend to at least one-quarter of the US corn and soybean areas", Richard Feltes at broker RJ O'Brien said
Whether the upswing is the start of a sustained 2013 summer row crop rally "will depend on subsequent weather developments", he added.
Huge wheat short
In soybeans, hedge funds cut their net long position in the week to July 2 for a third successive week, this time by more than 17,000 contracts, although maintaining a relatively large net long position of 110,812 lots.
The net long position in soymeal was also cut for a third week, with hedge funds raising their net short position in soyoil to more than 35,000 contracts, the highest since April.
In wheat - often a focus for managed money short holdings, frequently in spreads against long bets in corn or soybeans - hedge funds raised their net short position by more than 30,000 contracts above 50,000 contracts for the first time in more than a year.
That also put the net short close to a record high.
However, while wheat prices would gain a pull from a rise in corn values, a US heatwave likely not prove as serious a threat for wheat crops, with much of the winter crop already in the barn and dry weather a bonus for the rest of the harvest.
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