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G20, Speculators, and Corn

Grain markets are once again under pressure this morning, especially the corn market. The violent selloff cannot be justified by good weather alone, so what is going on? 
 
French President Nicolas Sarkozy has been very outspoken about reducing the volatility in grain prices, blaming speculators for driving up food prices, something he describes as a ‘plague’. As France currently holds the presidency of the G-20, they have over the past two days hosted a meeting of farm ministers in Paris to tackle the issue. It was reported this morning that they had reached some sort of agreement, though the details are still somewhat sparse. The bullet points of the agreement are greater transparency in global agricultural markets by way of a central database, a call for greater international market regulation (with the aim of curtailing the involvement of purely financial players), and the development of emergency food reserves. More detailed information will become available soon, and I will certainly discuss them here in the future. 
 
Why has this spooked the markets? Non-commercial large traders, mostly hedge funds and other speculators, hold an enormous long position in the corn market. As of Tuesday last week, the last data available from the CFTC, these traders held a net long position of 460,200 contracts in corn. This represents about 31 percent of the total market (see chart).
 
Non-Commercial Large Traders vs. Price (Corn)
Courtesy of Bloomberg
 
Since that time, prices have fallen by 78 cents per bushel to yesterday’s close of 677 ½ basis July futures, a 10.3 percent decline. During that same period, open interest in the corn market has fallen from 1.482 million to 1.414 million, a 67,683 decline or 4.5 percent. I suspect that when the more recent Commitment of Traders report is released tomorrow afternoon it will reveal that these non-commercial large traders have significantly reduced their long positions. 
 
What does this mean for future prices? When big positions are entered or liquidated, it distorts the market price, taking it away from the fair market value. A prolonged liquidation of a position this size will certainly bring corn prices down below where they should be based on the tight supply and ravenous demand. This is not to say that corn is a buy at this price, but once these traders stop selling their longs, I suspect we can expect a rebound. Keep an eye on the open interest for a halt to the decline.


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