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Brokers offer hope for revival in corn futures

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Brokers, citing hedge fund positioning and the firm US cash market, offered hope of at least a temporary lull in the selling in US corn, even as prices staged a small rebound from their weakest close in four months.

Societe Generale said that it was mulling a switch to "bullish" from "neutral" in its rating on corn futures, given their "disconnect" with the relatively firm US cash market.

Indeed, basis, the discount of futures to cash prices, has risen both inland, as measured in Iowa, and at Gulf of Mexico ports over the past month, a dynamic the bank attributed to resilient demand.

"Corn demand remains stronger than expected in both the export and ethanol markets," SocGen analyst Christopher Narayanan said.

"Feed demand, too, through the first two marketing quarters of 2013-14 suggests higher-than -expected demand when compared to the historical percentage use by marketing quarter."

'Poised for a modest rally'

The outperformance of the cash market could well "suggest that nearby corn prices are nearing a bottom and poised for a modest rally", Mr Narayanan said.

If upward pressure from cash markets "continues for a sustained period of time, one can expect flat price to eventually rally".

The bank - which last week forecast corn futures averaging $4.87 a bushel in the July-to-September quarter, well above the futures curve - added that it was biased towards long positioning in nearby contracts until more was known on new crop prospects, which currently appear good.

A much-watched US Department of Agriculture report on US sowings, released on June 30, is seen as giving an updated view on harvest prospects, and the day will also see the release of estimates for domestic grain stocks as of June 1, giving an insight into demand for last year's crop.

Longs vs shorts

Separately, Brian Roach at US broker Roach Ag Marketing flagged the potential for the reports to trigger a rally in corn based on the growing number of short positions that hedge funds have taken out in Chicago futures and options.

Latest regulatory data showed managed money, a proxy for speculators, reducing its net long in Chicago corn futures and options by 120,000 contracts, to 146,436 lots, in a little over a month.

However, this shift has been driven overwhelmingly by investors taking out fresh short positions rather than cutting net long positions – by a ratio of 3:1.

Margin factor

"Outright corn longs are not far from the May high water mark but new short positions have increased," Mr Roach told, adding that this kind of behaviour often reflected the same investor taking out opposing bets.

"This spreading of margin risk - establishing a new short offsetting position - is not uncommon as it allows losses on paper to co-exist with profitable positions without adding further margin money."

As for how this dynamic plays out, that "depends on the weather and how the USDA sees demand in the June 30 stocks report

"A short-covering rally would ensue if traders are caught off guard," he said, adding that the acreage report could also prove "friendly" to corn prices in showing sowings "much smaller area than currently thought".

'Almost erroneously high'

Another technical sign that has attracted investor attention is the ratio between new crop November soybean futures and December corn which, even while a touch lower at 2.75: 1 on Wednesday remains high by historical standards.

"What levels the November soybean-December corn spread needs to trade, or should be trading, is debatable, but current values are historically very rich," Brian Henry at Benson Quinn Commodities said.

"Corn is trading near contract lows while soybeans are still at lofty prices, due to heavy intra-commodity spreading of corn vs soybeans," another US broker said, adding that this was true for contracts heading into 2015 too.

The distant premium of soybeans to corn "is almost erroneously high this far out considering the large gain in soybean acres we have in this country this year and the price incentive to plant soybeans in South America and in the US again in the spring of 2015".

Corn futures for July 2014 and December 2014 delivery both stood at $4.41 ¼ a bushel at 05:40 Chicago time (11:40 UK time) up 0.6% and 0.4% respectively.


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