(Bloomberg News) For three excruciating weeks in May, Renee Haugerud, the founder of New York hedge fund Galtere Ltd., agonized that her wager on corn was a massive mistake.
She had started buying in March, when futures contracts averaged about $5.59 a bushel, expecting steady to rising demand from ethanol refiners and feedlots to boost prices. Instead, on May 10, the U.S. Department of Agriculture reported record planting and forecast a bumper crop. Prices began a 12% slide for the month. Other hedge funds bailed.
Haugerud, 57, the daughter of a part-time farmer, fought the temptation to join the crowd. Instead, she and her team got to work. They rechecked past corn yields and plowed through ethanol production and export numbers to reconfirm their calculation of strong demand for a so-so crop.
The U.S. Environmental Protection Agency bolstered their case in April when it raised the limit for ethanol in gasoline to 15% from 10% for cars made after 2001, later aiding the buying Haugerud had forecast. As for supply, Haugerud thought the USDA was overoptimistic in its harvest prediction. If farmers were planting in amounts not seen since 1937, her farm upbringing and commodities experience told her they were tapping marginal land. This all didn't add up to a corn bonanza.
"Our research said that, at best, we were going to get an average yield," she says. "The market was pricing in perfection."
For a gut check, at month's end, Haugerud flew to the firm's research farm in southern Minnesota, near where she had grown up. As she scooped a handful of dirt, her confidence in her corn bet swelled. The dry soil crumbled. And the stalks were less than knee-high, with some well below average at 6 inches.
Her analyst, swinging through Iowa, Illinois and Indiana, reported that farmers were complaining about heat-a sign of impending drought.
"I was shocked how short the crop was," Haugerud recalls in her corner office in the Scribner Building on Fifth Avenue, where, when not touring fields and mines, she's chief investment officer overseeing five analysts and traders. "I'm a tire kicker, not a screen watcher."
Haugerud used her crop smarts this year to trounce rivals. Thirty-two states, from South Carolina to Nevada, baked in the worst drought since 1956 during a year that toppled the 117-year-old U.S. heat record. Corn contracts hit $8.1775 a bushel on July 30, more than $2.50 above March levels.
Haugerud, who sold her futures position that day, says grains and soybeans will keep up the momentum. Farmers are expected to harvest 10.7 billion bushels of corn, the smallest crop in six years, the USDA said in September. Soybeans gained 37% this year through mid-September, the most among the 24 commodities tracked by the Standard & Poor's GSCI Spot Index.