* Price of December corn contract hit record Friday
* Hedge funds bought $11 bln in corn futures in latest week
* Drought likely to further diminish corn crop
By Katya Wachtel
NEW YORK, August 10 (Reuters) – The worst Midwest drought in
a half century and resulting damage to the U.S. corn crop are
creating an investment opportunity for some hedge fund managers.
Hedge funds Galtere, a $550 million commodity-focused global
macro fund led by Renee Haugerud, and Woodbine Capital
Management, a $500 million fund led by former SAC Capital
Advisors portfolio manager Joshua Berkowitz, are among the
winners on this summer’s so-called “corn play.”
And Friday morning, the outlook for corn farmers got even
grimmer with the U.S. Department of Agriculture slashing its
forecast for this year’s harvest by 17 percent to 10.8 billion
bushels. If borne out, that would mean the lowest level of
production since 2006 and the lowest average yield for U.S.
farms in 17 years.
Already, shares of the Teucrium Corn fund, the main
exchange-traded fund that tracks the price of corn, are up more
than 46 percent since mid-June. Corn on Friday traded at a
record $8.33 per bushel for the December contract, up more than
60 percent since mid-June.
“Rains have been sporadic here in the Midwest for the past
week with one to two inches falling, which for corn is not
enough. I think corn is going to trade up to $9.50-$10.00 over
the next couple of months with the next leg perhaps beginning
after Friday’s report and to $12 if an export ban is put in
place,” said Larry Jeddeloh, founder and chief investment
officer of the North Oaks, Minnesota-based TIS Group, an
institutional research firm that also manages client money.
Galtere earlier this year began betting the forecasts of a
bumper corn crop would fall short, in part because of changing
weather patterns.
“We got in a little earlier than some funds,” said Geoffrey
Fila, an associate portfolio manager at Galtere. “We thought it
was erroneous of the market to assume a record yield, especially
after the global weather challenges of the last 12 months.”
Beginning in early April, Galtere began increasing its
exposure to December 2012 corn futures contracts in the
expectation of higher grain prices. In July, Galtere’s flagship
fund rose 5.3 percent. For year, the fund is up 9 percent.
By comparison, hedge funds overall are up 2.88 percent on
average this year, according to hedge fund tracking firm HFR.
Woodbine Capital Management posted a 3 percent gain in July,
largely because of bullish bets on rising grain prices, said a
person familiar with the fund.
In an investor letter reviewed by Reuters, Berkowitz said
“an expanding drought in the U.S. Midwest has dramatically
increased the likelihood that crop yield losses will exceed
government forecasts.”
DROUGHT’S SEVERITY
On Wednesday, the U.S. government reported that July was the
hottest month ever in the continental 48 states.
With the U.S. election three months away, President Barack
Obama said separately that Congress needed to complete work on a
new five-year, multibillion-dollar farm bill. Republican leaders
in the House of Representatives, however, proposed a $383
million disaster package for livestock producers before
adjourning for the summer.
Much of the interest from hedge funds in corn has come in
the past month or so.
The gross exposure of hedge funds and other large
speculators to corn futures as of Aug. 1 was $11.3 billion, up
from $3.2 billion as of June 20, according to U.S. Commodity
Futures Trading Commission reports.
The thinly traded Teucrium Corn ETF has seen a surge in
activity from hedge funds and proprietary trading firms. As
recently as July 24, some 570,000 shares of the corn ETF were
traded. In April, average daily trading volume was well under
100,000 shares.
Major buyers of the ETF during the first quarter were
proprietary trading firms such as Jane Street Capital and
Susquehanna Financial Group, as well as investment arms of big
banks, including Wells Fargo, Citigroup and UBS
. On Aug. 14, hedge funds are required to report their
U.S. stock holdings as of the end of the second quarter.
BETTING ON CORN DERIVATIVES
Corn futures and the corn ETF are not the only corn
investments attracting interest from hedge funds and
speculators.
Hedge fund industry analysts said managers also are looking
to play the spike in corn prices by betting against shares of
companies that are particularly sensitive to rising food prices,
such as grain processor Archer Daniels Midland Co and
The Andersons Inc, which produces ethanol from grain
and other products.
Ian Horowitz, an agribusiness analyst at Topeka Capital
Markets, said, however, that fertilizer companies, among them
Mosaic Co, may benefit from the higher price
environment, as farmers spend more on fertilizers and crop
nutrients. Mosaic, has gained about 9 percent this year.
But Malinda Goldsmith, a partner at Dallas-based Four
Seasons Commodities, where she oversees a $50 million portfolio,
said in that in corn, “the easy money has been made.”
Goldsmith’s fund specializes in agricultural investments,
with about a third of its capital allocated to corn. The
portfolio gained 10 percent in July after rising 6 percent in
June.
“We have not started shorting the (corn) market. But we’ve
got a little more conservative” on the bullish side of the corn
bet, Goldsmith said.
(Additional reporting by Barani Krishnan; Editing by Matthew
Goldstein, Jennifer Ablan and Steve Orlofsky)
