Hedge Funds Sitting Out Big Corn Trade: Street Whispers

NEW YORK (TheStreet) -- Big volatility and surging real prices are usually the playground for hedge funds looking for some easy speculative trading gains. But the drought that has crippled the 2012 U.S. corn crop has yet to attract the big money players.

Government intervention -- coupled with hedge funds' weak agricultural commodities trading chops -- is keeping big money hedge funds mostly on the sidelines of the current drought-driven corn rally, said Bryan Doherty, senior market adviser with agricultural commodities trading consultant Stewart-Peterson Group.

"Anytime you see a big move it's going to attract the interest of speculators," Peterson said. "But right now I don't think they are in the market enough."

More than 50% of the United States remains in a moderate drought or worse, according to the National Drought Mitigation Center at the University of Nebraska. That is a continuation of a catastrophic, record-setting drought that has gripped the U.S. since June.

The U.S. corn crop has been hardest hit, with the almost half of the year's crop rated as poor or very poor, according to the U.S. Department of Agriculture. That has pushed up prices, with December corn futures Thursday ending at $7.96 per bushel after hitting a record $8.20 on Tuesday, according to the Chicago Board Options Exchange. Corn prices jumped 27% in June, the crop's biggest gain since 1988.

But despite the huge spike in prices and continued weather-driven volatility, big hedge funds looking to deploy some of their speculative capital have yet to appear, Doherty said.

"The speculators were heavier in the market during the 2008 drought," Doherty said. "But now you have a drought that is much worse with a crop that is rated poor in at least 49 states, and you can only match the 2008 corn price high."

Doherty blamed the U.S. government's handling of the crisis by taking "a billion bushels" of corn off the market and "front running" investors, in addition to the lack of hedge funds that have the expertise to trade in agriculture commodities. Funds like Stark Investments -- which recently closed its large multi-strategy fund -- and Man Group have all but left the market.

With no end in of the drought in site, Doherty explained that corn prices remain artificially low unless speculators can enter the market.

"If the market were left to its own devices, you would be seeing prices near $9 or $10 a bushel," he added.