The 2010 Corn Crop: The Bullish and Bearish Sides of this Commodity
by Tony Daltorio, Investment U Research
Tuesday, May 18, 2010
Across the nation’s entire Corn Belt, tractors are racing across the fields to sow their seeds.
Traditionally, they should be no more than halfway through the process at this point in the season. Yet thanks to the warm, dry weather across the country’s Corn Belt, they don’t have much further to go.
According to the U.S. Department of Agriculture (USDA), over the past five years, farmers have planted an average 40% of their corn seeds by mid-April. And in 2009, they didn’t even get 33% in the ground.
But this year marks a record 60 million acres, roughly 70% of what they intend to grow. In Iowa, the biggest corn-growing state in the country, farmers have already taken care of nearly 85% of their intended acreage.
Even better, Archers Daniels Midland (NYSE: ADM) Executive Vice-President John Rice recently told analysts that, “the outlook of the crop looks fantastic.”
But that optimistic outlook might be a bit too much too soon…
The Bearish Side of Corn
In all, the USDA expects farmers here to seed about 88.8 million acres of corn this spring, the second largest amount since 1946. That prediction – and great weather so far – has boosted harvest forecasts.
And that in turn, has lowered expectations for corn prices by the end of the year.
On average, analysts believe the 2010-11 crop yield could jump to 165-170 bushels per acre. And some people even believe it could be as high as 172.5 bushels. Either way, it tops last year’s record high of 164.9.
It also reflects a structural change in the U.S. agribusiness industry.
High corn prices between 2004 and 2009 recapitalized U.S. farmers. They took that money and invested it in equipment such as GPS enabled tractors. Those helped them squeeze planting sessions into shorter time frames, allowing them to take advantage of nice weather and even plow at night.
Such advances played their part in the 13% slide upcoming corn futures have taken since the beginning of this year. The USDA reported that as of March 1, corn reserves had hit 7.69 billion bushels, a 23-year high. Many industry insiders expect it to fall another 12% towards $3.20 a bushel.
Of course, that works out nicely for ethanol producers, such as Archer Daniels Midland. The same goes for hog processor Smithfield Foods (NYSE: SFD) and poultry producer Pilgrim’s Pride (NYSE: PPC), which both claim corn-based animal feed as their biggest expense.
Purchasing either of their stock is an excellent way to play this game… if corn prices do decline the way everybody expects.
The Case For Bullish Corn
Right now, corn prices support a bullish view filled with just the right amount of sunshine and rain.
But that pretty picture may or may not hold up in the long run. And if it doesn’t, that would blind-side the market.
According to Scott Irwin and Darrel Good, agricultural economists at the University of Illinois, poor weather later this year could cut yields to just 134.5 bushels per acre. And that would send prices up to $5.75 a bushel.
Investors can play that possibility through two exchange traded notes (ETNs) that offer large exposure to corn, keeping in mind that they do involve credit risk to the issuing bank.
iPath Dow Jones-UBS Grains Total Return ETN (NYSE: JJG) allocates nearly 36% of its portfolio to the golden vegetable, while Elements MLCX Grain ETN (NYSE: GRU) devotes about 27%.
In addition, Teucrium Trading LLC has filed with the SEC for an ETF that invests in corn futures. If approved, it will trade under the symbol CORN.
The proposed fund allocates 35% of its portfolio to second-to-expire Chicago Board of Trade (CBOT) corn futures contracts, 30% to third-to-expire CBOT corn futures contracts, and 35% to corn futures contracts expiring in the December following the expiration month of the third-to-expire contracts.
Purchasing any of the above could prove profitable, but keep a close watch on the weather as this growing season unfolds.
Good investing,
Tony Daltorio
Related Investment U Articles:
- The Corn Market: Butter Up Your Portfolio
- The Corn Crop Won’t Offer Relief to Rising Food Prices
- Global Corn Demand Puts Smart Investors in the Green
- As Corn Prices Pop, Investors Are Set to Make Great Grains
- As Wheat Prices Rise… Carbohydrates Are Back in Style
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