Corn Bulls in Retreat as Near-Record Costs Curb Demand

Bloomberg News  • Posted: Monday, September 17, 2012

Corn bulls are retreating after the U.S. government said that the worst drought since 1956 will damage the crop less than analysts had expected and on speculation that near-record prices will curb demand.

Twelve of 28 analysts surveyed by Bloomberg said they expect prices to fall next week. Eleven were bullish and five were neutral. Bears outnumber bulls for the first time since April. Corn has lost 2 percent this week, heading for the biggest decline since June. Open interest, or outstanding futures contracts, on the Chicago Board of Trade contracted 6.3 percent in the past three weeks.

Prices are retreating after jumping as much as 68 percent in about two months, reaching a record $8.49 a bushel on Aug. 10. The U.S. Department of Agriculture said Sept. 12 global demand will drop 0.9 percent in the 2012-2013 marketing year, the first decline in 17 years. While the agency said U.S. farmers will collect the smallest crop in six years, the estimates for both production and stockpiles were greater than the average prediction in a Bloomberg survey of as many as 35 analysts.

“Demand is at risk,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen who has traded raw materials for more than a decade. “With supply now more or less known, the driver in the month ahead will be the demand response to the high prices.”

Wheat Contracts

Corn rose 21 percent to $7.8275 this year, the sixth- biggest advance in the Standard & Poor’s GSCI gauge of 24 commodities behind soybeans, two wheat contracts, silver and cocoa. The index added 7.8 percent. The MSCI All-Country World Index of equities gained 13 percent and Treasuries returned 1.7 percent, a Bank of America Corp. index shows.

Global corn consumption will drop to 856.7 million metric tons in the year starting Oct. 1, from 864.7 million tons a year earlier, the USDA estimates. Livestock farmers will use 0.6 percent less corn in feed for animals than estimated in August, leaving worldwide ending stocks 0.5 percent higher than previously forecast at 123.9 million tons.

U.S. export sales for delivery before Aug. 31 slumped 30 percent to 10.032 million tons as of Sept. 6, the smallest for that period since 2005, according to USDA data compiled by Bloomberg. The USDA lowered its estimate for U.S. exports by 3.8 percent from a month earlier to 31.75 million tons, down 19 percent from a year earlier.

U.S. Midwest temperatures and precipitation in June and July were the hottest and driest since 1936, according to Commodity Weather Group LLC in Bethesda, Maryland. The biggest U.S. corn-growing states are Iowa, Illinois and Nebraska.

Northern Kansas

Freezing temperatures as far south as central Nebraska and northern areas of Iowa and Illinois on Sept. 17, 18 and 21 may reduce the quality of corn kernels, said Drew Lerner, the president of World Weather Inc. in Overland Park, Kansas. Winds gusting up to 35 miles an hour may cause some drought-weakened corn plants to fall over, reducing yield potential, he said.

Prices may have to rise further before consumption is constrained, Damien Courvalin, an analyst at Goldman Sachs Group Inc. in New York, wrote in a report Sept. 12. The bank expects corn to trade at $9 in three months before retreating to $7.50 in 12 months. Crop conditions in the U.S. are the worst since 1988, with the harvest about 15 percent complete as of Sept. 9, USDA data show.

Hedge funds are still near their most bullish in about a year, according to U.S. Commodity Futures Trading Commission data. While they cut their net-long position, or bets on higher prices, by 8 percent in the week ended Aug. 28, they increased them again by 2.6 percent the following week. They are now holding a net 323,629 futures and options, compared with a six- year average of 185,000 contracts, the data show.

Exports Canceled

China’s imports may fall to 1 million tons in 2013, from 5.5 million tons this year, because of record prices, state- owned researcher said in a Sept. 13 report. Importers from China canceled contracts, with weekly U.S. sales to the Asian nation showing net cancellations at least four times since July, the USDA data show. China is the world’s second-biggest consumer of corn after the U.S.

Rising prices are also curbing demand from biofuel producers. U.S. ethanol production slid to the lowest level since the end of July in the week ended Sept. 7, Energy Department data show. Producers are losing about 41 cents on each gallon of ethanol, based on fuel and corn contracts for December, according to data compiled by Bloomberg. More U.S. corn went to make ethanol than livestock feed in 2010-11 for the first time ever.

USDA Forecast

Soybean traders are still bullish after the USDA forecast the U.S. crop will fall to a nine-year low of 2.634 billion bushels (71.69 million tons) and global consumption will rise for a fourth straight year to a record. Fourteen of 27 people surveyed anticipate higher prices next week and seven forecast a decline. Soybeans rose 46 percent to $17.585 a bushel this year and reached a record $17.89 on Sept. 4.

Twelve of 18 traders and analysts expect raw sugar to gain next week and three were bearish. The commodity slipped 11 percent this year to 20.73 cents a pound on the ICE Futures U.S. exchange in New York

Fifteen people surveyed said copper will rise next week and seven predicted a drop, while two were neutral. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, gained 10 percent to $8,382 a ton this year.

Twenty of 29 traders and analysts surveyed said gold would rise next week, seven were bearish and two were neutral. Futures on the Comex exchange in New York added 13 percent since the start of January to $1,777.10 an ounce.

Bull Market

Holdings in exchange-traded products backed by the metal expanded to a record 2,492.95 tons yesterday, data compiled by Bloomberg show. Hedge funds have raised their bets on higher prices to the most in six months on expectations the U.S. will add measures to boost growth, CFTC data show.

Raw materials entered a bull market last month after rising more than 20 percent from their June low. Commodity assets under management expanded to $406 billion in July, from $390 billion a month earlier, Barclays Plc estimates.

“We’ve seen very strong commodity performance in terms of agriculture and in some oil products, but other markets have been much weaker, so overall things are leveling out,” said Kevin Norrish, a managing director for commodities research at Barclays in London. “Longer-term it’s clear that there are still plenty of investors who want to allocate to commodities.”