Bearish bets on agricultural commodities by managed money in hedge funds are soaring close to all-time record highs. As each week passes, these funds continue to add to their shorts, betting that prices will fall.
This is particularly true in corn and wheat.
The latest figures from the week ending on April 28 show that funds added more than 27,000 lots of net shorts in corn. This brings the total to a 16-month high of 92,383 contracts.
All-time record highs were also set in short positions for both Chicago soft red winter wheat, which was above 100,000 contracts net short, and Kansas City hard red winter wheat. This action sent wheat prices to a five-year low.
Overall, this brings the total short wheat position to an astounding figure – well over 14 million metric tons!
Now, these crowded investors are in a highly vulnerable position…
What Could Possibly Go Wrong?
Apparently the “smart” money has the inside track on what fickle Mother Nature will do this year.
The contrarian in me is screaming that a lot could go wrong, namely unfavorable weather reducing crop sizes. And I’m not alone.
The International Grains Council isn’t buying the bearish talk of the hedge funds, either. It’s actually forecasting a small deficit, with demand exceeding the supply of wheat in the 2015-2016 crop year.
The profit potential of a short-covering rally is huge. Especially if another wild card, in addition to weather, comes into play.
You see, a story out of China caught my eye.
China Central Television (CCTV) aired a segment called “Rat in the Granary” on April 20, reporting that much of the country’s vast reserves of grains, which are held in government warehouses, may be badly degraded or even rotten!
In a major corruption scandal uncovered by CCTV, in some provinces storage managers for Sinograin – China’s grain reserve corporation – have embezzled public funds.
On the books, the managers paid grain merchants the price for freshly harvested grain, but they actually bought years-old grain at dirt-cheap prices and kept the difference.
This corruption has forced local farmers to sell their grain to private merchants at discounted prices, as government warehouses only buy grain from those with “guanxi,” or connections.
Apparently much of the grain bought is of little or no use.
Just think of the implications …
China holds an estimated 40% of the world’s corn reserves. But if the grain stored in some of their warehouses is unusable, China will have to turn to imports to meet its needs. And higher Chinese imports equal higher corn prices.
And it may have already begun. Late last year, the Chinese did approve some imports of genetically modified corn, which the United States grows.
Sow Your Investment Seeds Now
The corruption news is just one of many possible events that could force the grain bears back into their caves.
Still, the average investor can profit from a return to normalcy in the corn and wheat markets.
The easiest route is through the use of exchange-traded funds from Teucrium.
The Teucrium Corn (NYSE:CORN) and the Teucrium Wheat (NYSE:WEAT) are both designed to reduce the effects of contango and backwardation. In other words, investors get a truer price.
Both CORN and WEAT own three different futures contracts – the second-to-expire contract (35%), the third-to-expire contract (30%), and the December contract following the third-to-expire contract (35%).
And thanks to the “smart” money and their one-way bet, these ETFs are offering a solid contrarian play.
And the chase continues,