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Traders and hedge funds are betting that corn prices will soar to record prices of $9 a bushel or more as the worst US drought in half a century decimates the global corn crop.
Benchmark front-month corn futures have already risen 50 per cent since early June, touching a record high of $8.28 a bushel last week.
But the options market has seen an explosion of bets that prices will rally well beyond current levels.
The number of call options that would give traders the right to buy corn at prices between $9 and $10 in December has risen nearly thirteenfold in the past month, according to data from CME Group, the exchange.
Corn has shrivelled across the US Midwest in the past month, with 48 per cent of the crop rated “poor” or “very poor” at the end of last week, according to a weekly survey from US Department of Agriculture – the worst rating since 1988.
One commodities banker said trading houses and corn consumers had been “using options extensively”.
“Trade houses have been protecting themselves against non-delivery and consumers are starting to accelerate their hedging programmes,” he said.
“We have certainly seen some merchants looking to take risk off the table,” said Luke Chandler, head of agricultural commodities research at Rabobank, a leading lender to agribusiness. “When they realised just how significant this is, they were looking to unwind hedges.”
Traders expect the USDA, which last month cut its forecast for the crop by 12 per cent to 12.97bn bushels, to reduce its estimates again when it releases a closely watched projection of supply and demand next week.
Greg Page, chief executive of Cargill, the world’s largest trader of agricultural commodities, said in a CNBC interview that the US crop could now be “perhaps 11bn [bushels] or less – I think the problem is serious”.
Goldman Sachs last week cut its forecast for the US crop to 10.75bn bushels and predicted prices of $9 a bushel, while some traders say prices could rise even higher. “I think we’re headed to $9,” said a senior trader. “$10 or $11 is possible.”
But traders say that the market could see a sharp price reversal, particularly if the US government were to relax regulations that mandate ethanol production from corn.
“Just if they announce that there may be a change of legislation, I think will put the market limit down,” another trading house executive said.
Yesterday corn prices dipped 1.7 per cent to $7.93 a bushel, while soyabeans fell 3.1 per cent to $16.68 a bushel as meteorologists predicted slightly more rain over the next few days.
Nonetheless, leading forecasters including the US National Weather Service expect the US Midwest to see hotter and drier conditions than average over the next month.