Agricultural futures and options trading at CME Group surged 23 percent in 2010 to an all-time high, as a smaller-than-expected U.S. corn harvest and shrinking cattle and hog herds sent speculators racing into commodity markets.

Tightening global grain supplies and stronger demand pushed corn futures above $6 a bushel for the first time in over two years, while cattle and hog markets also notched multi-year highs. Heightened supply uncertainty led to wider price swings and attracted investors dissatisfied with recent returns in traditional vehicles such as stocks, analysts said.

“Increased volatility always brings interest in these markets,” said Chad Henderson, an analyst with Prime Agricultural Consultants, Inc., in Brookfield, Wis.

“Investors really struggled to find places to put their money,” Henderson said. “Buying commodities seemed like it was a popular choice. You had a lot of interest in owning commodities, and agriculture really powered to the forefront of it all.”

An average of 908,021 agricultural commodity futures and options contracts changed hands each day at last year at CME, compared with 737,063 in 2009, the Chicago-based exchange operator said in a statement today. In December, agriculture trading averaged 829,564 contracts, down 34 percent from 1.26 million in November, a record for any month, but up 36 percent from December 2009.

Corn futures and options led the 2010 trading surge with average daily volume of 358,308 contracts, up 38 percent over 2009 and a record for any year. Soybeans also posted an all-time high at an average of 185,692 futures and options contracts, up 3.3 percent. Corn futures and options accounted for nearly two-fifths of agriculture trading.

Live cattle futures and options averaged 53,054 contracts, up 32 percent and a record, while lean hog trading averaged 34,507 contracts, up 16 percent.

Hedge funds, swap dealers and other types of speculators built large positions in many grain and livestock futures last year, contributing to record trading days for cattle and other markets. Speculators tend to accumulate more long positions, or bets prices will rise, than short positions. That generated criticism from some who contend speculators have gained too much influence over prices for key farm commodities.

In December, the head of the largest U.S. livestock feed association said commodity markets have been “distorted” by speculators, forcing farmers to contend with extreme market volatility and absorb higher costs for fertilizer and fuel.

Agriculture “had to deal with extreme price volatility on a number of fronts without the effective support of our primary risk mitigation tool – the futures markets,” Joel Newman, chief executive officer of the American Feed Industry Association, told a House subcommittee Dec. 16.

Those markets “were severely compromised by Wall Street banks’ ability to avoid speculative position limits and invest substantial levels of monies in the physical commodity markets,” Newman said. He urged government regulators to impose position limits as part of a financial reform bill passed earlier in the year.

Corn futures rallied 52 percent in 2010, outpacing both the Dow Jones Industrial Average, which rose 11 percent, and the Standard & Poor’s 500 index, up 13 percent.

But any weakness in grain and livestock markets this year may cool speculator enthusiasm, prompting them to bail out of agricultural positions, analysts say.

Henderson said he’s bearish on the corn market, and expects current prices above $6 a bushel to curb demand and send prices lower by the end of this year, possibly by more than $2. Additionally, Henderson expects U.S. farmers to boost corn seedings by 2.8 million to 3.8 million acres this spring, or about 2.3 percent from 2010 plantings, setting the stage for a potential record crop that replenishes supplies.

“There’s a great chance of raising a record corn crop this year,” Henderson said. “Farmers are going to do everything they can to raise as big a corn crop as possible, and they have the money to do it.”
“I don’t believe we can sustain $6 corn,” he added. “A lot of the bullish news is priced into the market. Everybody’s leaning too long this market now.”

At today’s close, March corn futures fell 12 cents to $6.08 ½ a bushel, down from a 29-month high of $6.34 reached yesterday.

Trading in CME’s core financial products also jumped this year as volatile global markets led to increased demand for contracts based on Treasury bonds and notes and the S&P 500 index.
For the year, CME trading averaged 12.2 million contracts a day, up 18 percent from 2009, the exchange said. Agricultural contracts account for about 7.5 percent of total CME trading.