Has the correction in grain prices overshot?

Australia & New Zealand Bank sounded a rare, bullish note in grain markets - where wheat hit an eight-month low this week, and Chicago's May corn contract came within an ace of matching it, by cautioning over the extent of investors' "negative tone".

December corn futures, for instance, the benchmark contract for the upcoming US autumn 2013 harvest, had, in falling to $5.40 a bushel in early deals, reached "a level below where December 2012 corn futures traded at this time last year", ANZ senior ag economist Paul Deane said.

"Yet global stocks for both corn and wheat are lower than this time last year.

"This leaves markets highly vulnerable to any production issues over the next five months."

'Prepare for a rally'

As an extra potential support for prices, the April-to-June period "also represents the lower period of supply for grain consumers", Mr Deane said.

The market's weakness offered "an opportunity to position into grain markets for any rally into the next quarter".

He seized on Kansas hard red winter wheat as the best bet for long exposure, given both "more supportive" fundamentals for higher quality wheat, compared with the lower spec grain traded in Chicago, and the extent of speculators' negative positioning.

Managed money, a proxy for speculators, held a net long position of 1,754 contracts in Kansas wheat futures and options as of last week, a historically low number, and down from levels above 50,000 lots in October.

Investment ideas

Beside an outright bet on call options in Kansas wheat, the bank suggested as an alternative a long bet in futures hedged against Chicago corn.

The bet reflected the fact that Kansas wheat appeared "underpriced" relative to corn on a near-term futures basis.