Sunday, March 31, 2013

Hedge funds hurt by drop in corn, wheat prices, but the decline may be short-lived

Agricultural commodities got slammed last week as a result of two news items.

1. Corn planting acreage is expected to hit the highest level since 1936. With supplies low and prices expected to stay firm, farmers are planning to expand the number of acres used for corn. This points to an immense flexibility of the US agricultural economy.
Farm Futures: - The Farm Futures survey of more than 1,750 growers found farmers ready to plant 97.43 million acres of corn, up .3% from 2012. If achieved, the total would be the most since 1936.

The increase in soybeans could be even more dramatic. Farmers said they want to plant 79.09 million acres this spring, up 2.5% from 2012 and easily an all-time record if achieved.
2. While corn supplies are materially lower than last year, the latest USDA data showed stocks did not decline as quickly as expected. Apparently the demand for animal feed has been relatively weak.
Farm Futures: - May corn futures dropped their daily 40-cent limit this morning, after USDA shocked the market once again with a March 1 grain stocks number that showed much bigger supplies than expected.

At 5.399 billion bushels, inventories are down 10% from a year ago. The government's estimate was above even the forecast from Farm Futures survey, the largest pre-report estimate in the market, and almost 400 million bushels above the average trade guess.

The data suggests lower than expected corn feeding during the second quarter of the marketing year and perhaps greater 2012 crop production as well. Wheat stocks of 1.234 billion were also greater than expectations, implying less wheat was also fed than traders anticipated.
Anecdotal evidence suggests that a number of hedge funds got caught being long corn and were forced to unwind. CFTC data shows speculative net positions in corn as of 3/26 at the highest level (net long) for the year.

Speculative corn net contracts (source: CFTC)

The unwind forced a violent selloff across agricultural futures, particularly corn - hitting daily down-limit.

May corn futures (source:

With speculative players licking their wounds, some agricultural commodities may present a good investment opportunity. Here are some reasons the selloff in corn may be short-lived after the market digests the news.

1. Demand for soybeans from China may yet encourage a shift from corn and wheat acreage into soy. It won't take much of a shift to send prices higher.
Farm Futures: - "With stocks of both corn and soybeans projected near historic lows, strong acreage this spring is a must to rebuild inventories," says Farm Futures Senior Editor Bryce Knorr, who conducted the research. "... Some 18% of those surveyed said they could still shift 50% or more of their acres."
2. South American crops are expected to remain moderate, as logistics and weather have curtailed significant crop improvements.

3. The US may be in for another 2012-style drought in 2013.
Inside Climate News: - Drought conditions in more than half of the United States have slipped into a pattern that climatologists say is uncomfortably similar to the most severe droughts in recent U.S. history, including the 1930s Dust Bowl and the widespread 1950s drought. 
Source: U.S. Drought Monitor

The 2013 drought season is already off to a worse start than in 2012 or 2011—a trend that scientists at the National Oceanic and Atmospheric Administration (NOAA) say is a good indicator, based on historical records, that the entire year will be drier than last year, even if spring and summer rainfall and temperatures remain the same. If rainfall decreases and temperatures rise, as climatologists are predicting will happen this year, the drought could be even more severe.

The federal researchers also say there is less than a 20 percent chance the drought will end in the next six months.
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