Corn 'to outperform soy' thanks to hedge fund bets

23.07.2013

Hedge funds turned less negative on corn price prospects, but remain net short by a historically high amount – raising the prospect of a substantial switch in the fortunes of prices of the grain compared with soybeans.

Managed money, a proxy for speculators, raised its net long position in futures and options in the main US-traded agricultural commodity contracts by 37,000 lots in the week to last Tuesday, according to data from the Commodity Futures Trading Commission, the US regulator

The increase, following two weeks of speculators turning more bearish in their positioning on agricultural commodities, reflected largely a closure of short positions in Chicago corn, over which there were some concerns that US weather may prove less threatening than had been thought.

Investors closed some 10,000 short contracts in corn during the week, which started firm for corn prices.

'Prices will drop'

Nonetheless, the corn the net short position – the extent to which short bets, which profit when prices fall outnumber long positions, which benefit when values rise – was, at 37,272 lots as of Tuesday, the second largest on records going back seven years, signalling hedge funds are still positioning for price falls.

Speculators' net longs in grains and oilseeds, July 16, (change on week)

Chicago soybeans: 124,432, (+12,244)

Chicago soymeal: 51,359, (+3,051)

Kansas wheat: -7,454, (+412)

Chicago wheat: -34,261, (+13,583)

Chicago soyoil: -36,105, (+1,945)

Chicago corn: -37,262, (+18,505)

Sources: Agrimoney.com, CFTC
Indeed, "the prediction of ideal weather conditions in the US growing areas, suggests for prices will continue to drop in the short term", Commerzbank said.

"Weather forecasts are predicting cooler temperatures and occasional rainfall in the US Midwest.

"Such conditions are regarded as optimal for the critical pollination phase in which the majority of US corn plants currently find themselves," the bank said, also flagging expectations that a US Department of Agriculture report late on Monday will reveal an improvement in the condition of the domestic crop.

Soybeans vs corn

By contrast, new crop soybean prices have held relatively firm, supported by demand for old crop supplies and by the potential setback to sowings of double crop soybeans from the delayed winter wheat harvest, which they are sown after.

Speculators' net longs in New York softs, July 16, (change on week)

Cocoa: 31,791, (+30)

Cotton: 59,058, (-584)

Arabica coffee: -21,460, (+5,388)

Raw sugar: -77,346, (-18,513)

Sources: Agrimoney.com, CFTC
The USDA has forecast that US farmers will sow an unusually large area - approaching 8m acres, or 10% of the crop - of double crop soybeans this year.

Furthermore, for soybeans, weather in August, which brings the sensitive pod-setting period, is typically more crucial than July, the key month for corn, in witnessing peak pollination.

Hedge funds raised their net long in Chicago soybeans by more than 12,000 contracts to some 124,000 lots in the latest week, a relatively high exposure to rising prices

The average net long position is about 94,000 contracts.

'Large swings in the opposite direction'

This positive positioning in soybeans relative to corn could pave the way for a swift reversal, assuming weather proves benign for pod-setting too.

Speculators' net longs in Chicago livestock, July 16, (change on week)

Lean hogs: 61,196, (+1,891)

Live cattle: 40,862, (-2,238)

Feeder cattle: 3,037, (+1,541)

Sources: Agrimoney.com, CFTC
"The managed money went from a large net long position in corn to a net short position this year, yet they are still very long soybeans," a US broker said.

"It fits perfectly with the fact that soybeans have been holding more support than corn during that time frame as the corn - bean ratio clearly shows. "

New crop soybean prices were at an unusually strong level of 2.56:1 in Chicago, as of Monday, compared with new crop corn, up from levels below 2.10:1 late in 2012.

"With a sizable position held by the funds we could see some large swings in the opposite direction once they decide to liquidate," the broker said.

"That would be something to watch out for if we start out August with good weather and a good forecast."

'May drop below freezing'

Hedge funds also raised their net long exposure to soymeal, and cut their net short in soyoil, the other main soybean processing product, in the latest week.

And they slashed by more than 13,000 contracts their net long position in Chicago wheat, amid improved signs of demand, with China, Egypt and others, making significant purchases, and with some concerns over the quality of the US soft red winter wheat crop.

However, investors for a second week raised sharply their net short position in New York raw sugar futures, for which prices fell on July 16 to a three-year low.

Nonetheless, the latest short bets are not proving so lucrative, given the revival of some 3% in prices since then, with the turn wetter in the weather outlook for Brazil, threatening cane harvesting in the top producing and exporting country.

"Up to 5 inches of rain is slated this week, and temperatures may drop below freezing according to some forecasters," Luke Mathews at Commonwealth Bank of Australia said.

"If realised, the undesirable weather could result in further downgrades to Brazilian sugarcane production prospects."


agrimoney