Macquarie: Corn, cotton, coffee and wheat to suffer from index re-weighting

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Macquarie Agri-view
Corn, cotton, coffee and wheat to suffer from index re-weighting 

Feature article
 The annual rebalancing of commodity index funds kicked off from today. Initial
estimates point to an overall negative impact on the ags and softs futures
markets. The anticipated selling of lots on the back of this, both relative to
daily traded volumes and to open interest, is expected to hit the corn, coffee,
cotton and wheat contracts the most. But the impact will be temporary, as
fundamentals remain constructive for all of these markets. Unless another
bout of risk-aversion resumes (the current rebound of the US dollar is a
notable short-term bearish pressure), prices should strengthen again in a
month or so.

Latest market update
 Having shot up to new 30-year highs of more than 34c/lb at the end of
December, the new year saw NY sugar ease off sharply to 31c/lb today, as
the US dollar bottomed out on strengthening US economic prospects. News
of brighter prospects for Brazil’s 2011/12 (Apr-Mar) crop following decent
recent rainfall added to the softer tone. Very few mills are operating in CS
Brazil due to the rains, yet there remains good import demand from Chinese,
Middle Eastern and potentially Russian customers. Even Australia, where
flooding in Queensland has led to a 25% reduction in sugar export, is seeking
Brazilian sugar to help meet contractual obligations.
 NY cotton futures surged in December to close to 159c/lb as a result of
relatively low world stocks, before easing off this week. Low levels of
uncommitted cotton and robust demand contributed to the price increase.
According to ICAC, only about 10% of projected world trade of 8.3mt is still
available for purchase at this relatively early stage of the season. The scarce
uncommitted supply will support prices and cause increased volatility through
the rest of the season. US export commitments as of the end of December
had reached 90% of the projected season exports. All of India's and 85% of
Central Asia's projected exports for 2010/11 have been committed.
 New 13-year highs were achieved in Arabica coffee futures last week to close
to 240c/lb amidst thin trading volumes and a bullish underpinning. The
anticipation of 2011 being a tight year continues to support substantial
speculative length (although as discussed in this report, we expect some
selling in the next couple of weeks of index traders, with prices having already
fallen to 232c/lb).
 The political unrest in Ivory Coast helped push cocoa prices up sharply at
year-end, due to a risk premium associated with potential disruptions should
the impasse escalate into something more serious. Cocoa arrivals at ports in
Ivory Coast reached 596,167t by Dec 31, almost level with 595,290t in the
same period a year ago, as exporters are keen to ship the product out while
they still can. Despite the desertion of large numbers of key staff in Ivory
Coast, the relatively good pass through of cocoa to end destinations has reinjected
a bearish tone to the market, and NY prices have fallen back down to
below US$2,900/t.