Speculators are flocking to corn in a manner reminiscent of early 2008, just before investor panic contributed to a crash in crop prices.
The non-commercial net long position in corn was 384,169 contracts as of Sept. 2, compared to a 2008 peak of 379,000 contracts.
“That’s just an enormous position right now,” said Darin Newsom, senior analyst with Talent DTN.
He said there are always risks when speculator interest is that strong in a commodity.
Speculators helped push the price of crude oil past $145 per barrel in 2008 and then bailed out in droves when the world economy began to falter, driving crude prices down to $30 by the end of the year. Crop prices followed suit.
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Newsom said the same situation could develop in agricultural commodities if there is another global economic hiccup.
“They may all decide at the same time to get out. We’ve seen it before. It’s kind of the nature of the beast and it can certainly happen again.”
However, he doesn’t expect to see a price crash of the 2008 magnitude if it does happen.
“The buffer that the grains have, corn and soybeans in particular, against that same sort of meltdown this time around is bullish fundamentals.”
There is short supply and growing demand for corn and soybeans, the two price leaders in the crops sector. Newsom doesn’t believe another global economic meltdown would provide enough of a shock to seriously weaken strong agricultural markets.
What comforts him is a look at deferred spreads in corn markets. There is a small premium held by the March contract over the December contract, the May contract over the March contract and so on.
That means commercial traders are pushing up nearby contracts to try to secure corn supplies, which is a sign that they are concerned about possible short supply.
Corn prices could rise to the point where demand cracks and soft red winter wheat starts replacing corn in feed or ethanol markets. That would cause the spread between deferred contracts to widen.
“That’s going to be the warning sign,” said Newsom.
But for the time being, investors appear to be comfortable with agricultural commodities and arelikely to stick wit hthem, betting on the idea that global food demand will continue to rise.
“Right now, both corn and soybeans are very bullish and that should keep any type of long liquidation coming from the investment side held in check,” said Newsom.
