Is Agriculture Getting Too Risky?

By Brad Zigler

Too much of a good thing. That's the best that can be said about the USDA report on planting intentions for wheat and soybeans.

Corn was a different story. The government's estimate for corn acreage was bullish. At 86 million acres, the number was more than a million acres shy of experts' average guesses. That sparked an 18-cent (3.3%) rally in May corn futures at the CBOT open. Futures were also buoyed by Friday's surprise hog numbers showing 2.3% more pigs and hogs on hand than previously estimated. Hogs eat a lot of corn, so buying hedges may further bolster prices.

And the news about the other grains? Eh, not so bullish.

Soybean plantings figure to be 74.8 million acres versus analysts' estimates of 71.7 million, a signal that a lot of corn acreage is being switched to beans. May bean futures opened 4.4% lower and have since slid below the $12 level for the first time since December.

A little more than 14.3 million acres will be given over to hard red spring wheat, the basis for the CBOT futures contract, according to USDA. Industry insiders figured slightly less, averaging an estimate of 14.2 million acres. Still, a surprise is a surprise. The May CBOT wheat contract was whisked to 2.4% lower opening, a level not visited since February.

Not surprisingly, the effect on ag-based ETFs and ETNs has been mixed. The iPath Dow Jones-AIG Grains ETN (NYSE Arca: JJG), for example, has been trading modestly lower, owing to its 31% corn allocation being swamped by its soybean and wheat exposure.

Exposure seems to be on the minds of commercial ag entities, too.

The share price for packaged food giant ConAgra (NYSE: CAG) remains firm around the $24 level this morning as the market continues to digest news of the company's sale of its commodity trading operations to hedge fund operator Ospraie Management.

The deal, announced after Thursday's close, triggered gap-up trading in ConAgra shares on Friday's open. The company's stock price jumped 6% overnight.

Ospraie Management is reported to be the world's biggest commodities hedge fund firm with approximately $9 billion in assets under management.

Ospraie's deal is not the first - though it's definitely the largest - hedge fund entry into the physicals market. Whitebox Advisors LLC bought a Minnesota grain elevator from agri-titan Cargill Inc. earlier this year.

So why the fund interest in the cash commodities business? Burgeoning volatility in grain prices has made it harder for traders to manage risk. A presence in the physicals market gives the hedgies better intelligence on fundamentals and planters' intentions, making for more well-informed bets.

ConAgra leaves the merchandising business while the getting's good. "Given our existing and ongoing emphasis on our core strategic food platforms, along with the strength of the commodities cycle, we believe this is an excellent time to exit this business," said Gary Rodkin, ConAgra's chief executive officer. "The sale gives us a unique opportunity to redeploy capital, largely toward share repurchases."

Does ConAgra see a top in commodities prices? You could parse that from Rodkin's statement. It may not be this week or even this month (the ConAgra deal closes within 60 days), but clearly ConAgra is thinking there are better places to ply its trade.

The question to ask now is "Who else feels this way?"

May CBOT Corn