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Hedge Funds Face Off With Analysts in Corn Ahead of Key Report

Michael Hirtzer and Dominic Carey
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Hedge Funds Face Off With Analysts in Corn Ahead of Key Report

(Bloomberg) -- There’s a rumble brewing in the corn market as hedge funds and analysts take opposite views ahead of a key crop report.

A Bloomberg survey showed that traders and analysts expect the U.S. Department of Agriculture will be aggressive in cutting its outlook for domestic corn yields, with an average prediction of 166.5 bushels an acre. That would be a whopping 3 bushels below the USDA’s August estimate and would likely send the market higher.

The analysts are betting record rains that pummeled America’s heartland earlier this year will finally force the USDA to become less optimistic on the crop as harvest nears. But they’ve also expected that to happen in each of the last few months, and the agency instead has continued to deliver an outlook for a comparatively bigger harvest that’s sent prices tumbling. The hedge funds seem to be positioning for a repeat of that scenario, increasing their bearish wagers for a seventh straight week.

“If they did have a big cut, that would exacerbate a rally very quickly,” said Alex Norton, director of risk management at research and brokerage firm Beeson & Associates Inc. in Crestwood, Kentucky. More likely, he said, is either a modest cut or even an increase in the USDA yield estimate. His firm didn’t participate in the Bloomberg survey.

“People tend to forget how much technology and seed improve from year to year,” Norton said.

The corn market has been rocked in recent months by higher volatility as traders tried to get a handle on just how big of an impact the spring deluge will have on production. Even though farmers faced historical planting delays, they still managed to get a lot of acres seeded. And while crops are behind normal development stages, it’s still warm in the Midwest and so far, at least, there’s been no risk of frost damage. That could give the plants time to finish strong before harvest.

The USDA will release it monthly World Agricultural Supply and Demand Estimates (WASDE) report on Sept. 12 at noon in Washington.

When the data hit in August, it showed both more-than-expected U.S. corn planted acres and bigger-than-forecast yields. Futures in Chicago sank the most in six years after the report and they still haven’t recovered, with the December contract that reflects the harvest falling to a fresh record low on Friday.

Hedge funds are gearing up for more losses.

In the week ended Sept. 3, investors’ net-short position expanded 27% to 119,371 futures and options, according to U.S. Commodity Futures Trading Commission data published Friday. The holding, which measures the difference between bets on a price increase and wagers on a decline, was the most bearish since mid-May.

Short-only wagers rose for the seven straight week, the longest streak since March.

The USDA’s September crop figures will include data from the agency’s so-called objective yield measurements, in which corn plants and ears are counted and factored into broader estimates that also include input from farmers.

The agency tends to be fairly conservative when it comes to changing its outlook. Since crops are still relatively immature, the USDA could delay making any drastic cuts until after fields are harvested. Still, there’s some precedent for the decrease that’s forecast in the survey. In 2011, the agency made an August-to-September reduction to its corn yield estimate of 4.9 bushels. But that was a rare exception to the more measured approach the agency usually takes.

For WASDE coverage on Sept. 12, follow our TOPLive blog.

To contact the reporters on this story: Michael Hirtzer in Chicago at mhirtzer@bloomberg.net;Dominic Carey in Washington at dcarey5@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Millie Munshi, Patrick McKiernan

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