Grain prices slump as speculators bail out

(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.

The 7.9 percent plunge in wheat since Feb. 18 and a decline in corn and soybeans means speculators probably kept cutting positions this week, said Nic Johnson, who helps manage about $30 billion in commodities at Pacific Investment Management Co. in Newport Beach, California. Speculators reduced bets on rising wheat prices by 23 percent in the week ended Feb. 15, Commodity Futures Trading Commission data show. Bullish bets on soybeans fell 18 percent and those for corn slid 3.4 percent.

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.

"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."

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Agricultural "products had a great run, but now the opportunity appears to be in oil and gold," said Walter "Bucky" Hellwig, who oversees $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." A long position is a bet that the price will rise.

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. CFTC data covering the week ended Feb. 22 is scheduled to be released at 3:30 p.m. today in Washington. The managed money category includes hedge funds, commodity pools and trading advisers.

'OFF THE CHARTS'

"The amount of speculative positions is off the charts," Johnson said. "What you've seen in the last few days is liquidation of that."

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 prices has plunged 14 percent. Corn has dropped 6.7 percent from a 31-month high of $7.4425 a bushel reached Feb. 22, and soybeans slid 9 percent since touching a 30-month high of $14.5575 a bushel on Feb. 9.

Grains prices rebounded today, with wheat for May delivery climbing 5.75 cents, or 0.7 percent, to $7.8825 a bushel by 11:01 a.m. in London. Corn fell 2.25 cents, or 0.3 percent, to $6.9425 a bushel.

"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."

LIBYA CLASHES

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."

The move into agriculture accelerated in the past six months. Corn is up 40 percent since the end of September, while soybeans advanced 20 percent and wheat 16 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.

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. An index of net holdings in wheat, corn, soybeans, coffee, sugar, lean hogs, live cattle and cocoa reached a record 972,958 the week ended Sept. 28.

LIVESTOCK

"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 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 consultant in Washington. "It's very hard for politicians to ignore public angst even when that angst is founded on imperfect information."