By Asjylyn Loder and Yi Tian
(Updates speculator holdings in second paragraph and updates percentages in 13th paragraph.)
Feb. 25 (Bloomberg) -- Hedge funds are leading an exodus from agricultural markets, slashing bullish bets in the U.S. from almost the highest levels on record after grain prices slumped, money managers said.
Speculators reduced bets on rising wheat prices by 57 percent in the week ended Feb. 22, the biggest drop since November, according to data released today by the Commodity Futures Trading Commission. Bullish bets on soybeans fell 17 percent, declining for a third straight week, and those for corn slid 1.8 percent to a seven-week low.
Holdings in eight agriculture commodities by money managers are higher than during the global food crisis three years ago. Floods from Canada to Australia and drought from China to Russia ruined crops and drove food prices tracked by the United Nations to a record in January. That helped spark protests across North Africa and the Middle East, toppling leaders in Tunisia and Egypt.
Agricultural ?products had a great run, but now the opportunity appears to be in oil and gold,? said Walter ?Bucky? Hellwig, who helps oversee $17 billion at BB&T Wealth Management in Birmingham, Alabama. ?If I am the hedge-fund manager, I?m getting killed on the long grain positions.?
?Off The Charts?
Before today, the Standard & Poor?s GSCI Agriculture Index of eight futures declined 6.8 percent since Feb. 17, a four- session slump that was the longest since October and included an 11 percent plunge by Chicago wheat futures. The managed-money category of investors tracked by the CFTC includes hedge funds, commodity pools and trading advisers.
?The amount of speculative positions is off the charts,? said Nic Johnson, who helps manage about $30 billion in commodities at Pacific Investment Management Co. in Newport Beach, California. ?What you?ve seen in the last few days is liquidation of that length.?
Wheat futures reached a 29-month high of $9.1675 a bushel on the Chicago Board of Trade on Feb. 14, and since then the price is down 12 percent. Before today, corn dropped 6.4 percent from a 31-month high of $7.4425 a bushel reached Feb. 22, and soybeans slid 8.7 percent since touching a 30-month high of $14.5575 a bushel on Feb. 9.
Prices rebounded today. Wheat futures for May delivery advanced 28.75 cents, or 3.7 percent, to close at $8.1125 a bushel, while corn futures for May delivery gained 25.5 cents, or 3.7 percent, to $7.22. Soybean futures for May delivery jumped 45.75 cents, or 3.4 percent, to $13.75.
?Nerves on Edge?
?Some funds definitely had a harrowing moment,? Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset Advisors, said by telephone from Cincinnati. ?There were some nerves on edge.?
Crude oil traded on the New York Mercantile Exchange jumped to $100 a barrel on Feb. 23 for the first time in two years as clashes in Libya threatened to disrupt supplies from Africa?s third-biggest producer. Through yesterday, gold rose for eight consecutive trading sessions in New York.
Loyalists of Libyan leader Muammar Qaddafi are seeking to crush dissent in the capital, Tripoli, as opponents tighten their control of eastern cities. The fighting is the most violent yet seen in six weeks of protests across the Middle East and North Africa.
In agriculture, ?the big speculators were holding very large net-long positions and have begun to liquidate those positions to take some profits after the strong rally,? said Dan Cekander, the director of grain research at Newedge USA LLC in Chicago. ?We may have reached the limit of their buying.?
Agriculture Move
The move into agriculture accelerated in the past six months. Corn is up 46 percent since the end of September, while soybeans advanced 24 percent and wheat 20 percent. Open interest, or contracts outstanding, reached record levels this month for all three commodities, according to Chris Grams, a spokesman for CME Group Inc., the world?s largest futures market.
Investors put a record $2.6 billion into agriculture-index swaps, exchange-traded products and medium-term notes last month, after pouring $5.7 billion during the fourth quarter of 2010, according to Barclays Capital.
Bullish Bets
In the week ended Feb. 8, hedge funds and other speculators increased bullish bets on wheat to a combined 51,787 futures and options contracts, the highest since August 2007, CFTC data show. The net-long position in soybeans reached an all-time high of 179,753 contracts in the seven days ended Nov. 9, and corn reached a record of 429,189 the week ended Sept. 28.
Demand for new shares of 19 exchange-traded products tracking agricultural commodities rose 33 percent this year, according to data compiled by Bloomberg. Shares outstanding in Deutsche Bank AG?s $3.5 billion PowerShares DB Agriculture exchange-traded fund expanded 24 percent, data compiled by Bloomberg show. The number of shares in the fund fell 4.9 percent since reaching a record on Feb. 17.
?The trend itself is based on fundamentals, but price moves are magnified on the upside and downside by demand from speculators,? said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees $340 billion. ?There are a whole host of portfolios out there, and for a small fraction of them to be convinced to own some commodities, that is a huge new demand.?
Livestock
Barclays Plc?s iPath Dow Jones-UBS ETNs also attracted money. Shares outstanding in its $347 million grains ETN rose 83 percent since the start of the year, the $295 million agriculture index ETN more than doubled, and units in the $117 million livestock ETN increased 75 percent, according to data compiled by Bloomberg.
Demand also increased for structured notes, or debt packaged with derivatives linked to agriculture prices. Banks issued $139.4 million of agriculture-linked structured notes in the U.S. this month, 86 percent more than in all of 2010, according to data compiled by Bloomberg.
?There?s real scarcity there,? said Peter Timmer, a professor emeritus at Harvard University and an expert in food policy. ?We need to deal with that. But we don?t need to exacerbate the scarcity with all this hot money.?
The Dodd-Frank Act, enacted in July and named for its primary sponsors, former Senator Christopher Dodd and Congressman Barney Frank, expanded the CFTC?s authority to the over-the-counter market. The agency is drafting new market rules that may to go into effect later this year, including caps on the number of speculative positions one firm can hold.
Economy, Crops
Chicago-based CME Group said in an October letter to the CFTC that the agency can?t set caps without proof that excessive speculation is a problem.
?The real driving force behind what?s going on is global economic growth and reductions in crop size,? Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, said in a telephone interview Feb. 16. ?Political figures who are trying to blame rising prices upon speculation are ill-advised.?
French President Nicolas Sarkozy accused commodity speculators of ?extortion? and ?pillaging? in an address to the African Union on Jan. 30. He pledged to take action against traders during his leadership of the Group of 20 policy makers this year.
?Without a doubt, these higher prices will encourage a more robust regulatory effort,? said Gary Blumenthal, the president of World Perspectives Inc., an agricultural consulting company in Washington. ?It?s very hard for politicians to ignore public angst even when that angst is founded on imperfect information.?
--With assistance from Jeff Wilson in Chicago, Zeke Faux and Millie Munshi in New York and Sandrine Rastello in Washington. Editors: Steve Stroth, Daniel Enoch
To contact the reporters on this story: Asjylyn Loder in New York at aloder@bloomberg.net; Yi Tian in New York at ytian8@bloomberg.net
To contact the editors responsible for this story: Steve Stroth at sstroth@bloomberg.net; Dan Stets at dstets@bloomberg.net
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