Summer's dwindling corn crop spurs betting by some hedge funds

A worker drives a combine harvesting corn in a field near Altheimer, Ark. Crop yields are expected to be down from previous years because of drought conditions. ASSOCIATED PRESS Enlarge

CHICAGO -- 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.

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."

Last week, 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 40 percent since mid-June.

Galtere earlier this year began betting the forecasts of a bumper corn crop would fall short, in part because of changing weather.

"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 the 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, Mr. Berkowitz said "an expanding drought in the U.S. Midwest has dramatically increased the likelihood that crop yield losses will exceed government forecasts."

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.

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.

Corn futures and the corn ETF are not the only corn investments attracting interest.

Hedge fund industry analysts said some 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 Maumee-based 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.