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NEW YORK The worst Midwest drought in a half century and resulting damage to the U.S. corn crop are creating an investment opportunity for some hedge fund managers.
Hedge funds Galtere, a $550 million commodity-focused global macro fund led by Renee Haugerud, and Woodbine Capital Management, a $500 million fund led by former SAC Capital Advisors portfolio manager Joshua Berkowitz, are among the winners on this summer's so-called "corn play."
And Friday morning, the outlook for corn farmers got even grimmer with the U.S. Department of Agriculture slashing its forecast for this year's harvest by 17 percent to 10.8 billion bushels. If borne out, that would mean the lowest level of production since 2006 and the lowest average yield for U.S. farms in 17 years.
Already, shares of the Teucrium Corn fund, the main exchange-traded fund that tracks the price of corn, are up more than 46 percent since mid-June. Corn on Friday traded at a record $8.33 per bushel for the December contract, up more than 60 percent since mid-June.
"Rains have been sporadic here in the Midwest for the past week with one to two inches falling, which for corn is not enough. I think corn is going to trade up to $9.50-$10.00 over the next couple of months with the next leg perhaps beginning after Friday's report and to $12 if an export ban is put in place," said Larry Jeddeloh, founder and chief investment officer of the North Oaks, Minnesota-based TIS Group, an institutional research firm that also manages client money.
Galtere earlier this year began betting the forecasts of a bumper corn crop would fall short, in part because of changing weather patterns.
"We got in a little earlier than some funds," said Geoffrey Fila, an associate portfolio manager at Galtere. "We thought it was erroneous of the market to assume a record yield, especially after the global weather challenges of the last 12 months."
Beginning in early April, Galtere began increasing its exposure to December 2012 corn futures contracts in the expectation of higher grain prices. In July, Galtere's flagship fund rose 5.3 percent. For year, the fund is up 9 percent.
By comparison, hedge funds overall are up 2.88 percent on average this year, according to hedge fund tracking firm HFR.
Woodbine Capital Management posted a 3 percent gain in July, largely because of bullish bets on rising grain prices, said a person familiar with the fund.
In an investor letter reviewed by Reuters, Berkowitz said "an expanding drought in the U.S. Midwest has dramatically increased the likelihood that crop yield losses will exceed government forecasts."
On Wednesday, the U.S. government reported that July was the hottest month ever in the continental 48 states.
With the U.S. election three months away, President Barack Obama said separately that Congress needed to complete work on a new five-year, multibillion-dollar farm bill. Republican leaders in the House of Representatives, however, proposed a $383 million disaster package for livestock producers before adjourning for the summer.
Much of the interest from hedge funds in corn has come in the past month or so.
The gross exposure of hedge funds and other large speculators to corn futures as of August 1 was $11.3 billion, up from $3.2 billion as of June 20, according to U.S. Commodity Futures Trading Commission reports.
The thinly traded Teucrium Corn ETF has seen a surge in activity from hedge funds and proprietary trading firms. As recently as July 24, some 570,000 shares of the corn ETF were traded. In April, average daily trading volume was well under 100,000 shares.
Major buyers of the ETF during the first quarter were proprietary trading firms such as Jane Street Capital and Susquehanna Financial Group, as well as investment arms of big banks, including Wells Fargo, Citigroup and UBS. On August 14, hedge funds are required to report their U.S. stock holdings as of the end of the second quarter.
BETTING ON CORN DERIVATIVES
Corn futures and the corn ETF are not the only corn investments attracting interest from hedge funds and speculators.
Hedge fund industry analysts said managers also are looking to play the spike in corn prices by betting against shares of companies that are particularly sensitive to rising food prices, such as grain processor Archer Daniels Midland Co and The Andersons Inc, which produces ethanol from grain and other products.
Ian Horowitz, an agribusiness analyst at Topeka Capital Markets, said, however, that fertilizer companies, among them Mosaic Co, may benefit from the higher price environment, as farmers spend more on fertilizers and crop nutrients. Mosaic, has gained about 9 percent this year.
But Malinda Goldsmith, a partner at Dallas-based Four Seasons Commodities, where she oversees a $50 million portfolio, said in that in corn, "the easy money has been made."
Goldsmith's fund specializes in agricultural investments, with about a third of its capital allocated to corn. The portfolio gained 10 percent in July after rising 6 percent in June.
"We have not started shorting the (corn) market. But we've got a little more conservative" on the bullish side of the corn bet, Goldsmith said.
(Additional reporting by Barani Krishnan; Editing by Matthew Goldstein, Jennifer Ablan and Steve Orlofsky)