Corn, Soybeans Drop as Dollar Rally Cuts Commodity Investments

Corn and soybean futures plunged the most since October as a rallying dollar reduced the appeal of commodities as an alternative investment.

The dollar gained as much as 1.2 percent to a three-month high against a basket of six major currencies. Investors have been buying commodities with money borrowed in dollars at low interest rates, helping to fuel a 20 percent rally this year in the Reuters/Jefferies CRB Index of 19 commodities, including U.S. crops.

“The focus is on the dollar rally, and it’s been a big change in direction,” said Bill Nelson, a senior economist for Doane Agricultural Advisory Services Co. in St. Louis. “The dollar rally has cut some of the speculative interest in commodities, at least for the short term.”

Corn futures for March delivery fell 13.25 cents, or 3.2 percent, to $3.97 a bushel on the Chicago Board of Trade, the biggest drop for the most-active contract since Oct. 30. Before today, futures rose 22 percent in the past three months on speculation that rain, snow and wind would damage U.S. crops yet to be harvested.

Soybean futures for March delivery fell 37 cents, or 3.5 percent, to $10.30 a bushel in Chicago, the steepest decline since Oct. 2. Before today, soybeans rallied 3.9 percent over four straight sessions on increasing export sales to China, the biggest global consumer of the oilseed.

Carry Trade

An unwinding of the so-called carry trade in the dollar may pose the biggest threat to the global economy next year, Tao Dong, a Hong Kong-based economist at Credit Suisse AG, said today.

Such transactions, in which investors buy higher-yielding assets with dollars borrowed at low interest rates, may involve between $1.4 trillion and $2 trillion, Tao said. Unwinding the investments could cause volatility in currencies, commodities and emerging-market stocks, according to Tao.

Hedge-fund managers and other large speculators, excluding index funds, cut their net-long position in corn futures and options by 22 percent to 120,469 contracts in the week ended Dec. 8, down from a 16-month high a week earlier, data from the Commodity Futures Trading Commission show.

Index funds that invest in baskets of commodities reduced their net-long position in Chicago corn futures and options last week by 0.9 percent to 382,310 contracts. The net-long positions, or bets on rising prices, were also at a 16-month high a week earlier.

Soybean Speculators

In soybeans, large speculators reduced their net-long position by 2.4 percent to 79,182 futures and options contracts in the week ended Dec. 8, from a five-month high a week earlier, CFTC data show. Index funds reduced their net-long position by 0.9 percent to 163,427 contracts, from a 16-month high a week earlier.

“What brought all the investment money into commodities was the falling dollar, and now it is in a rally mode,” said Lee Gaus, a managing partner for EFG Group LLC in Chicago. “People that were long are now bailing out.”

Corn is the biggest U.S. crop, valued at $47.4 billion in 2008, followed by soybeans at $27.4 billion, government figures show. The U.S. is the world’s biggest producer and exporter of both.

By Jeff Wilson
Bloomberg