Corn Rallies After Hedge Fund Long Liquidation

Includes: AGU, CF, DIA, MOS, POT, TNH, UAN
by: Chris Damas
Corn, wheat and beans rallied today, up 3.3%, 3.6% and 0.5%, respectively, on the near-term contracts.
Fertilizer stocks also rallied, aided by the DJIA (NYSEARCA:DIA) current 67 point follow-thru from yesterday’s big last hurrah rally (up almost 400 points from the low and up 153 net).
On the NYSE at about 3 p.m. we were showing these gains:
Agrium (NYSE:AGU) - $67.65 up $2.68
CF Industries (NYSE:CF) - $132.51 up $8.32
Mosaic (NYSE:MOS) - $51.63 up $2.55
Potash (NYSE:POT) - $44.58 up $2.22
Terra Nitrogen (NYSE:TNH) - $140.72 up $7.68
CVR Partners (NYSE:UAN) - $20.83 down 91 cents
What’s changed? Nothing in the real world other than more euro-wallpaper sprucing up the deadbeat bank holding tank.
The hungry mouths around the world are probably even hungrier and crop stock to use ratios are still very tight.
Fundamentally, nothing had changed.
But new crop corn futures (harvestable in Fall 2012) dropped from $6.64/bushel three weeks ago to $5.52 (17%).
The big cliff dive on corn and other commodities such as oil and gold was caused by long liquidation of hedge funds out of USD denominated tradable bets.
According to a Reuters report on last Friday’s Commitments of Traders report by the U.S. Commodities Futures Trading Commission, $5 billion in gold futures were sold by long speculative funds last week, $3 billion of soybean futures, and $1 billion in oil contracts.
Fertilizer stocks tied to corn markets took it on the chin, with CF Industries going down to $115 yesterday, a full 40% off from the $192 high.
Is CF a super buy here? I would say yes, but be prepared for more volatility if another European bank bankruptcy moment occurs overnight. Dexia will be bailed out by the French and Belgian governments, leading to a lower euro, making the eurozone more competitive versus U.S. grain exports.
If you owned too many fertilizer stocks this past few weeks, you probably feel like your portfolio got run over by a combine.
Where to now? Barring another calamity such as a (choose 1) bank failure, sovereign credit downgrade or bad economic report requiring a dose of credit restoring money digoxin, the grains and fertilizer stocks should probably extend their gains as hedge funds exhausted their selling as discussed above.
The next milestone for ag and fertilizer traders is the next monthly World Agricultural Supply and Demand Estimate (WASDE) report from the USDA on Wednesday, which will include sharper estimates for crop production and stocks worldwide. The September report reaffirmed low corn yields but prices tanked soon afterward, leading to the aforementioned wholesale liquidation.
Therefore you have a couple more trading days (as in tomorrow and Friday) because Canadian Thanksgiving/U.S. Columbus day looms on Monday, before traders start positioning for the always exciting and hard to predict reaction to the USDA crop (change the vowel to an “a” if you’ve been burned on previous surprises) report.
Tomorrow, I plan to put out a report comparing two fertilizer MLPs (Master Limited Partnerships) that pay a high dividend yield (around 9%) and are often compared with one another: Terra Nitrogen (TNH) and CVR Partners (UAN).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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