By Gavin Maguire
CHICAGO Nov 12 – Large speculators are poised to pare their record-large short exposure to the corn market after the long-awaited November U.S. Department of Agriculture crop report revealed a broad swell in U.S. and world corn demand that should start to become the primary driver of price action going forward.
Speculators added to their short corn positions going into the report as harvest progress and reports of strong yields dominated market chatter. But with harvest winding down, money managers with short corn exposure are likely to start buying back some or all of those positions before any projected upticks in consumption lift prices too far off their recently depressed levels.
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TIME SENSITIVE
Large speculators built up their largest ever short stance in corn futures and options this year as U.S. and global corn supplies rebounded from last year’s drought-stunted levels to record heights.
Indeed, the USDA’s latest estimate of world corn production was the largest ever at more than 962 million tonnes, which was more than 100 million tonnes over last year’s total.
This swell in worldwide corn output handily outpaced projections for demand, which is forecast to climb to just over 933 million tonnes for the 2013/14 crop year from around 860 million a year ago. A 30-million tonne jump in projected world corn stocks to 164 million tonnes – the largest total since 2000/01 – also contributed to the sense of excess supply that characterized the corn market for the past several months.
Large speculators, or non-commercial traders, clearly subscribed to this bearish theme, transforming a roughly 60,000 contract long net position at the start of 2013 into a net short position of more than 230,000 contracts as of the most recent accounting by the Commodity Futures Trading Commission.
But now that supplies from the U.S. harvest have likely reached their ‘high water’ mark for the time being as harvest winds down and storage bins get filled up, overall market focus is likely to shift from supply to demand.
This likely goes for non-commercial traders as well, which are well aware of the emerging change of emphasis within the market and are under pressure to transform any potential ‘paper’ profits tied to their short futures exposure into ‘real’ profits by buying back those previously sold contracts.
These speculators will also be mindful that they are in good company in terms of their positioning, and will be keen to avoid any last-minute rush to square up their exposure ahead of the year-end.
NO RUSH
As important as it is for short-biased speculators to unwind those positions ahead of the year end, there is likely no need to panic and buy back those shorts in a rush. This is because the size of this year’s U.S. corn crop is not only larger than the demand requirements currently being projected, but is also likely larger than many U.S. corn growers had anticipated.
Yield reports from combine harvesters across the U.S. Corn Belt have consistently been above the levels expected by agronomists and grain handlers, and likely indicate that many growers are under-hedged relative to the size of their true total crop.
This means that growers will either have to make additional crop sales over the coming weeks, or risk storing that ‘excess’ grain un-hedged going into the new year.
And while many U.S. farmers are certainly cash rich enough to lock away large amounts of un-hedged grain, a large proportion will adhere to conservative risk management practices and hedge at least some portion of that additional supply in the futures and options arena.
Signs of that additional hedge pressure were evident during the price rally that followed the November crop report, and more such sales can be expected going forward into any further price strength.
Such sales will likely give short-biased speculators some time to unwind their positions without needing to chase prices higher.
But non-commercials cannot afford to be too complacent with regard to covering their shorts, as large-scale corn users are expected to be already accelerating their demand pace for the grain over the coming months, and could well spark a buying rush of their own if they collectively come to the conclusion that prices will only veer higher from here.
If large speculators get caught off guard by any such demand-led rally, they will only accentuate any resulting price rallies and limit their overall profit-making potential over the final weeks of the year.
