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Goldman Enters The "Corn Trade"

Tyler Durden's picture




 

All throughout the epic surge in corn prices, the big Kahoona, Goldman Sachs, where buy means sell, and sell means Goldman's traders are buying everything its clients have to dump, was quiet. That is no longer the case: "we recommend a short May-13 CBOT wheat position vs. a long May-13 CBOT
corn position." In other words, Goldman will now be selling May 13 corn. We all know how these recommendations end.

From Goldman:

Repositioning for CBOT wheat vs. corn underperformance

Corn production loss in 2012/13 worse than wheat

US and global wheat production will decline in 2012/13 on adverse weather in key exporting regions. However, the US drought is also leading to a significant loss of US corn production. With already low US corn inventories at the end of the 2011/12 crop year, we forecast 2012/13 US corn inventories at critically lower levels than wheat inventories. As a result our price forecast embeds a smaller wheat-to-corn premium than currently priced into the CBOT wheat and corn future curves. In particular, the low US corn production will likely require wheat use in animal feed rations and as a result corn prices to trade back near wheat prices.

Recommending a wheat-to-corn convergence trade

Consequently, we recommend a short May-13 CBOT wheat position vs. a long May-13 CBOT corn position. The biggest risk to this trade is a significant further shortfall in wheat production, including further sharp downward revisions to FSU production and the reinstatement of a Russian export ban for example. However, our wheat-to-corn pricing model, illustrated on page 2, suggests that such a risk may be priced in to a large extent. Assuming a 6% US corn stocks-to-use ratio, our model suggests that the current wheat-to-corn price ratio is consistent with a US wheat stocks-to-use ratio of 18%. Assuming all other items from the USDA's US wheat balance table remain unchanged, this level of stocks-to-use would correspond to US wheat exports rising from the 1,200 mmbu currently forecast by the USDA to 1,400 mmbu, a 5.4 million metric ton increase. To put in perspective, the USDA currently projects Russian production 7.5 MT above its 2010/11 decade low.

Positioning supports this view

Positioning as reported in the CFTC Commitment of Traders report also suggests that CBOT wheat prices may underperform corn prices: net speculative length has increased more for wheat than corn since late May, with wheat positioning near record net long while corn positioning remains less than half of its highs set last year (see page 2). Finally, given the current backwardation and contango in the CBOT corn and wheat curves respectively and our analysis of the seasonal of the wheat-to-corn price ratio, we believe that a May-13 expiration offers the best risk-reward.

 

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Wed, 07/18/2012 - 12:21 | 2628528 LawsofPhysics
LawsofPhysics's picture

So buy corn futures then?  Are you a man or a muppet?

Wed, 07/18/2012 - 12:39 | 2628627 Rahm
Rahm's picture

When I eat corn, and take a nice healthy goldman, I see the corn floating before it gets flushed.

Wed, 07/18/2012 - 14:39 | 2629326 TruthInSunshine
TruthInSunshine's picture

Goldman prods muppet clients to enter corn-hole trade.

Wed, 07/18/2012 - 18:54 | 2630056 UP Forester
UP Forester's picture

High priced HFCS gives the S&P a sugar high....

 

The corn guys on the TeeVee say that HFCS is the same as sugar, so let it buzz!

Wed, 07/18/2012 - 15:54 | 2629648 mkkby
mkkby's picture

Why is anyone stupid enough to do business with GS and the other fraud machines?  Guess they really are muppets.

Wed, 07/18/2012 - 12:21 | 2628530 fightthepower
fightthepower's picture

Fuck you Bernanke!

Wed, 07/18/2012 - 12:25 | 2628544 dracos_ghost
dracos_ghost's picture

I believe this is the basis of their CORN-HOLE algorithm.

Wed, 07/18/2012 - 12:31 | 2628546 buzzsaw99
buzzsaw99's picture

They will do anything to unload those corn positions! I expect the lame stream news to start broadcasting alien crop circle reports from Iowa soon as the next extraterrestrial sign to the sheeple of earth go long cornholio in bulk.

Wed, 07/18/2012 - 13:06 | 2628777 hbjork1
hbjork1's picture

I have winter wheat off of a little farm I rent out in IL. Some corn planted early will produc a little.  The corn not in the ground before the dry spell started, is GONE.  If it doesn't have moisture for germination, it is hardly worth cattle feed.

The larger story is that beef producers are selling off their herds because they can't afford to feed them.  Expect beef prices to get high and remain high for the winter.

Wed, 07/18/2012 - 13:34 | 2628952 TheGardener
TheGardener's picture

I admitted total harvest failure and got to plough in today
my veggies for replanting. Livestock unaffected, total loss
for a family of-four supplies on subsistence veggies and
potato`s less than an ounce a year on wholesale prices , so yes we can and will survive . This summer sucks for sure,
but nothing should have been planted on a jubilee year...

Wed, 07/18/2012 - 12:29 | 2628565 Atlantis Consigliore
Atlantis Consigliore's picture

Like gold/  just exited ahead of them last week; longs;   Out out out, better than the Cramer; fade.

Buy buy buy, sell sell sell, RUN RUN RUN  they know nothing but front run. 

 

Wed, 07/18/2012 - 12:32 | 2628574 Dr. Engali
Dr. Engali's picture

It looks like the corn run is over.Time to get out.

Wed, 07/18/2012 - 12:52 | 2628706 NEOSERF
NEOSERF's picture

$10/bushel corn is non-sensical, this is done...

Wed, 07/18/2012 - 18:59 | 2630063 UP Forester
UP Forester's picture

When I was a kid, $.25 candy bars were the norm....

http://www.usda.gov/oce/commodity/wasde/latest.pdf

Wed, 07/18/2012 - 13:21 | 2628841 Carl Spackler
Carl Spackler's picture

Precisely, Dr. Engali.

Finding muppets to take you out in this game of profit taking, now that the money has been made in the currently tired price run-up.

So the desk calls the propaganda team and asks them to create a stir and distribute a narrative to the clients.  If someone (i.e., a client) calls them out on being wrong, then their alibi is to blame it all on timing (and they walk, scot free)!

 

 

 

 

 

Wed, 07/18/2012 - 12:32 | 2628577 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

Corn & Hoofers

Wed, 07/18/2012 - 12:34 | 2628588 Hmm...
Hmm...'s picture

I'm no expert at all... but to short corn futures?  Anybody been to the midwest where the Earth is scorched?  Is there some Brazilian supply of corn I don't know about or something? 

This must be 11th dimensional chess... because I don't see how the worst drought in 60 years will lead to a bumper crop in corn this year. 

this must be one time when Goldman tells the truth (go long corn) so that they can rape you later when they trade against you then.

Wed, 07/18/2012 - 12:34 | 2628591 campag
campag's picture

the best corn trade is to go long oil products and crude

corn used in bio fuels /ethanol this will spike oil prices in time for the election

$6+ gasoline on the way

Wed, 07/18/2012 - 12:36 | 2628604 azzhatter
azzhatter's picture

Goldie, doing God's work

Wed, 07/18/2012 - 12:45 | 2628663 Hmm...
Hmm...'s picture

Be careful with beef prices.

Corn looks to go sky high.  This will increase the price of feed for cattle.

however, the drought is so bad that many farmers are having to sell their cattle because they can't afford to feed/water them.  This might bring a surge of beef to the market short term.

Later on we'll see a huge spike in beef.  But we may see a drop first.  too many variables to say for sure though.

http://www.usatoday.com/money/industries/food/2011-07-30-kansas-texas-south-drought_n.htm

Wed, 07/18/2012 - 12:40 | 2628637 Not Too Important
Not Too Important's picture

Famine in August? More than you know.

From Enenews.com:

Take a good look at this chart:

http://enenews.com/study-all-western-east-coast-covered-airborne-particles-march-20-model-shows-canada-based-solely-reactor-1-explosion-photo

That mass of radiation has spread across the Northern Hemisphere. Of interest here is the mid-West and the drought. Look closely at these heat maps:

http://www.zerohedge.com/news/us-climate-update-warmest-12-months-record

Notice any similarities? We have an inner-atmosphere radiation belt spreading across the entire Northern Hemisphere, spreading cancer and heart disease. The trapped heat is killing off our crops and most likely the cause of the very unusual flooding rains we're seeing this time of year. No crops, no food – radioactive or not.

 

"A relationship between drought and radiation occurred to me this morning after reading the headline.

I did some research and found that the relationship has been argued before, although it is hard to find in the scientific studies of radiation because most of those address nuclear war, which would cause more dust in the atmosphere.
=========

"Earthquakes and Nuclear Testing" by Dr. Gary Whiteford. Paper presented to the Second International Conference on the United Nations and World Peace, Seattle, Washington,
14 April 1989
http://www.orgonelab.org/UnusualNuclearEffects.pdf

[excerpt from the article on a previous study]:

The Spring 1992 issue of Journal of Orgonomy (1) carried a paper by James DeMeo describing research undertaken in 1990-1991 on the California drought, with a "Special Note on Underground Nuclear Testing and the Oakland Wildfires" that bears repeating here:

Weather Response to Nuclear Testing

In prior articles, I discussed a possible connection between underground nuclear bomb testing in Nevada to weather changes in the Western US.(2) A graph was published showing changes in 500 mb pressure over Nevada and Montana in 1990, with a generalized association with nuclear tests. Nuclear testing appeared to have increased atmospheric pressure in the upper atmosphere, a possible factor in the expansion of high-pressure drought conditions in the West.

[end excerpt]"

Here's a list of countries that are the largest importers of American grains:

http://en.rian.ru/infographics/20100812/160171412.html

If you want to make a killing in this criminal market, bet big on the grains - corn, wheat and soybeans. Then short to the max all those areas that are the largest grain importers, such as Mexico, the ME, South Korea and Japan - especially the ME and Japan. The food riots that started the Arab Spring are going to flare up much worse than they did before.

Those warships in the Gulf are not just there for Iran and Syria. The food shortages are going to cause civil wars, and some of our allies, such as Egypt (well, the military at least) might need US help.

We're in for a long fall, folks, and it isn't going to get better. The radiation in the atmosphere will last for another 10,000 years, but there's enough radiation on the ground now to make most of the world's crops into genetic freaks in a decade or less.

I wish you all well. There might be a 'moral' aversion to gambling on food and food riots, but you can bet the Primary Dealers and BBA banks are betting big on this. Clearly the Squid is leading the pack. Something about 'investing when there's blood running in the streets'. Well, here it comes. Hedge accordingly.

Wed, 07/18/2012 - 12:41 | 2628642 bxy
bxy's picture

They are probably long corn from 4.

 

Ethanol os dead they can't afford to produce it at these prices.

Wed, 07/18/2012 - 12:46 | 2628670 silverserfer
silverserfer's picture

 uh huh huh huh. corn.

Wed, 07/18/2012 - 12:49 | 2628692 JackT
JackT's picture

Watch out in Mexico, as food prices increase so do tempers. 

Wed, 07/18/2012 - 12:54 | 2628723 Squid Vicious
Squid Vicious's picture

also Gartman said to buy any dip in corn... surely the top is in

Wed, 07/18/2012 - 13:22 | 2628846 Jason T
Jason T's picture

I've got 38 corn stalks in back yard doing good this far..  shit I wish I grew more.. may need to get chicken coop in order sooner than I thought.  

Only the paranoid survive?

Wed, 07/18/2012 - 13:50 | 2629070 adr
adr's picture

The corn futures chart looks like the climategate hockey stick chart. This is pure insanity.

Corn contracts are the new tulip bulbs. Volume is double to triple the averages of just a couple months ago. Nearly 10X averages from three years ago. But no, all the volume doesn't add to a price far higher than a normal market.

It doesn't matter how high the price is when there is nobody willing to pay for it. Ranchers would rather sell off all their stock now instead of paying higher prices for feed.

Wall Street traders have no business speculating in commodities with the goal of flipping contracts for profit. I say again that what needs to happen is speculators thrown from the tops of buildings in NYC. The price of everything will be cut in half overnight.

Wed, 07/18/2012 - 14:30 | 2629278 notadouche
notadouche's picture

Question for the real Wall Street guys on this site.

Dean Foods reported upbeat earnings last quarter and the stock ramped up quite a bit reaching just a little over 17.  Suddenly the beginning of last week it started tanking quite a bit on no news taking 5 to 7% hits on large amounts of volume.  Then magically on Friday, the first news that I am aware of is that Goldman downgrades the stock to neutral based on this corn drought story which destroys the stock even more and then earlier this week some other brokerage downgrades with the stock now back below 13 pretty much taking it back to the levels before previous quarter earnings announcement.  Now is it so far fetched to believe there was a ton of front running ahead of the intitial Goldman downgrade?  I'm being a bit sarcastic here and I suppose my real question would be this should, in my opinion at the very least wouldn't this be very low hanging fruit for SEC investigation.   Or could there really be a coincidental rush to the exits 4 days prior to the Goldman downgrade?   And no I didn't get sucked into buying high and now stuck, I'm just an observer here and found this action to be messed up, but well hell I guess it's typical now though it shouldn't be.

Wed, 07/18/2012 - 14:53 | 2629415 Village Smithy
Village Smithy's picture

With the TBTF all on the ropes (in reality not pretend land) all sorts of this stuff is being tolerated as it helps to enhance the illusion that all is well. You know like the Fed turning a blind eye to LIBOR manipulation. "It's for the good of the people".

Wed, 07/18/2012 - 14:59 | 2629439 notadouche
notadouche's picture

Anyone knowledgeable about the affects of hoards of grasshoppers on corn and the like?   I live in the midst of the drought and other than it being drier than hell I've also never seen so many grasshoppers.  

Wed, 07/18/2012 - 16:02 | 2629693 mkkby
mkkby's picture

With higher food prices coming soon, no QE on the horizon.  It was off until after the election any way.

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