Buy Corn, Sell Wheat for December 2012 as Gap to Narrow, Henderson Says

Investors should buy corn futures that expire in December 2012 and sell wheat for the same month to profit as prices are set to converge, said Ian Bowler, who runs a hedge fund that’s beaten returns in the industry.

While corn’s shrinking stockpiles will boost the grain, global wheat supplies are ample, said Singapore-based Bowler, who helps run the Henderson Agricultural Fund. Investors may capture the spread between those two contracts -- currently about $1.35 a bushel -- as the gap narrows, he said.

His call reflects projections from the London-based International Grains Council, which expects corn reserves to shrink to a five-year low in the year to June 30, while wheat stockpiles climb to the highest in a decade. Any shocks in the corn market may spur shortages, said Bowler, co-manager of the fund with Sydney-based Phil Pyle. Bowler helps managed $160 million and the fund is part of Henderson Global Investors.

“You don’t have a lot of corn and you have a lot of wheat,” said Bowler, who has traded financial derivatives for two decades. The Henderson Agricultural Fund returned almost 27 percent in the first nine months, compared with an average loss of 4.8 percent for commodity hedge funds in the same period, as measured by the Newedge Commodity Trading Index.

Corn for delivery in December next year on the Chicago Board of Trade was $1.385 a bushel cheaper than wheat for the same month at the close yesterday. That’s not far from the 10- year the average of $1.45, according to Bloomberg calculations.

‘Close to Parity’

“Over time, that differential should roll and we should end up with the situation when corn and wheat are again trading at close to parity,” said Bowler.

Corn for December 2012 settled at $6.12 a bushel yesterday, while wheat for that month was at $7.505 a bushel. For the most- active contracts with delivery next month, corn was at $6.5325 and wheat was at $6.3875.

Global corn harvests are trailing demand for a third year, says the IGC, which includes more than 50 nations. Stockpiles may slide to 123 million tons this year from 131 million tons the previous year, it said in an Oct. 27 report. Wheat reserves will be 202 million tons, up from 195 million tons, it said.

Goldman Sachs Group Inc. (GS) expects wheat to become more expensive than corn, according to its Nov. 2 forecasts for the two commodities in three, six, and 12 months. Wheat may be 25 cents per bushel more costly than corn in three months, 35 cents more expensive in six months and 50 cents more costly in a year, according to the report.

Storage Fees

A higher storage rate for wheat in Chicago may discourage index funds from holding long-term positions as the fees “effectively put pressure” on costs, said Bowler.

The maximum storage charge for holders of Chicago wheat shipping certificates rose to about 20 cents a bushel per month from May 18 from about 17 cents, CME Group Inc. (CME), operator of the Chicago Board of Trade, said in April. The highest rate for corn is about 5 cents a bushel, according to CME.

Bowler, who cycles about 50 kilometers (31 miles) on a return trip along Singapore’s east coast every Monday morning, started his career as an options trader on the Sydney Futures Exchange in 1991. He traded his own book for 10 years before joining Sydney-based Attunga Capital Pty Ltd. in 2008.

Henderson Global Investors, the London-based asset manager that oversaw 74.4 billion pounds ($119 billion) as of June 30, completed a takeover of Attunga Agriculture Trading Ltd. in October, said Bowler and Henderson spokesman Richard Acworth. Attunga Agriculture was one of two hedge funds run by Attunga Capital, founded in 2005 by Ian Gibson and partners.

The agricultural fund trades grains, sugar, canola and “a bit” of palm oil, said Bowler. The fund, which can take as much as $500 million, returned 22 percent in 2008, 9 percent in 2009 and 4 percent last year. Pyle, 50, grew up on a dairy farm in Victoria State and together with Bowler handles the fundamental analysis.

To contact the reporter on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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