As Corn Prices Pop, Investors Are Set to Make Great Grains

by Tony D'Altorio

As Corn Prices Pop, Investors Are Set to Make Great Grains

by Tony D'Altorio, Investment U Research

Monday, April 4, 2011

The U.S. exports 60% of the world's corn supply, making the golden food its most important crop.

Corn is also the most valuable U.S. crop, worth $66.7 billion in 2010. And it will probably become even more so this year.

According to the U.S. Department of Agriculture (USDA), national acreage devoted to corn will expand to cover the second-largest area since World War II. Sowing will increase by 4% to 91.75 million acres.

Yet corn prices have already jumped by 90% over the past 12 months. Currently, they're hovering near their highest level since the 2007-08 global food crisis.

  • Third quarter forecasts put prices at an average around $7.15 a bushel. Besides the spike in 2007-08, that would be corn's highest price since at least 1977!

  • Even the expected huge crop can't match probable food and animal feed demand from countries like China.

  • And rapidly rising demand from the U.S. ethanol industry puts further pressure on prices.

These factors combine to cut U.S. corn inventories to a precarious 5% of global demand. This inventory-to-demand ratio matches the modern record low of the 1995-96 season.

It's only a notch above the all-time record set in 1937. And it's largely China and the ethanol industry's fault...

The Ethanol Industry's Corn Crop Addiction

U.S. ethanol industry demand will rise more than 8% in 2011. That eats up about 40%, or nearly 5 billion bushels, of this year's corn crop.

The share of ethanol demand in U.S. corn supplies just keeps moving up, but much more so in the last two years. After all, the industry consumed only 3.7 billion bushels in the 2008-09 season, less than 31% of the corn crop.

The sudden spurt has put U.S. supplies under massive strain.

Poor crops in Argentina, the Ukraine and elsewhere have exacerbated the problem. But without runaway ethanol demand, corn prices would likely be much lower.

The government supports ethanol through massive subsidies. So the industry can easily shrug off higher corn prices.

That then distorts the normal market ebb and flow of higher prices tempering demand. It also keeps the ethanol industry highly profitable for participants.

And it means that corn prices will continue to rise unabated.

Global Corn Demand Increases Exponentially

Increased global corn demand, especially from China - the world's second-largest corn producer - is adding to corn market woes. Despite its outtake, it expects to import its largest amount of corn in more than 15 years.

Last year, due to drought, China purchased 1.3 million tons of corn, its largest amount since the disastrous crop of 1995-96. Now some U.S. government analysts project it will import 2.5 million tons in 2011-12.

If so, that will be the third-highest level in the past 50 years.

China already imports the most soybeans, another animal food ingredient. But many see it having to turn to overseas corn suppliers to help feed its livestock, as meat consumption rises with the Chinese middle class.

Citing private forecasts, the U.S. Grains Council projects that China's existing corn inventory will cover only 15% of domestic demand this year. It even potentially sees Chinese imports as high as 9 million tons in the upcoming 2011-12 crop year.

The Council points to demand for livestock feed as part of that reason. But China's attempts to rebuild its inventories back to the government target of 30% of domestic demand will require even more.

This compares to the USDA estimate of only 1 million tons to be imported.

If that's true, the corn market is much tighter than even the most bullish traders imagine. It would push prices to new records, perhaps even to $8 a bushel.

That and the ethanol situation make the ETF, Teucrium Corn Fund (NYSE: CORN), an absolute must for investors' portfolios.

Good investing,

Tony D'Altorio

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