The Great Grain Opportunity of 2012 By Andy Hecht, Senior Commodities Editor Dear Sovereign Investor, Back in the day, when I was a trader on the giant precious-metals desk at the Phibro division of Salomon Brothers, I often heard the grain guys talk about "beans in the teens." Traders of course make their best money when a commodity is active and prices are moving up. And while soybeans have historically attracted a lot of speculative investment over the years, "beans in the teens" was often the wishful thinking of traders praying for a more active market. These days, everybody is talking about corn, and prices in the corn market have surged - thanks to its increased use in the production of ethanol and rising demand from Asia's middle class for a diet more complex and more satisfying than rice. In fact, farmers in the U.S. are planning the biggest corn harvest since 1944, when a bumper crop was needed to help feed war-torn and starving Europe.
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However, farmers are planting corn for one reason only - they're business people, and they believe corn will yield the most profit.
The current price of around $6.40 per bushel of corn is almost triple what it was back in 2000. Now farmers are allocating huge parcels of fertile land to grow corn this year and the planting season is about to begin. A bumper corn crop will yield bumper profits.
But hold on one second. The same thing happened back in 2008. Corn prices shot up to more than $7.50 a bushel, while cotton languished at 50 cents a pound. Growers could not make money growing cotton so they planted corn instead. Beans are Almost in the Teens and
They're Still Cheap Then a funny thing happened. The cotton market moved from 50 cents to $2.27 a pound because of the shift known as crop substitution. There simply was a deficit in the cotton market created by farmers opting to grow corn!
The prices of all grain markets are higher today. Global demand for foodstuffs is rising with the growing population.
Soybean prices at last glance were a healthy $13.29 a bushel - and today "beans are in the teens".
There have also been recent problems with soybean harvests in South America. Paraguay, the world's sixth largest producer of soybeans, has suffered a terrible drought which significantly reduced crop output this year. Similar problems occurred in Brazil and Argentina — the world's top number two and three soybean producers.
Here in the U.S., we are planting a huge corn crop, but what about the beans?
Well, I like to watch the relationship between corn and soybeans as a ratio. I find that this ratio can provide a road map to future prices or distortions in the grain markets. Today, the corn- soybean ratio is telling me something very interesting. 
Please click here to view larger image
As the chart shows, the corn-soybean ratio is at a historic low level today. It takes two bushels of corn to equal the economic value of one bushel of soybeans. The average for the past 25 years has been two and a half bushels of corn for each bushel of soybeans. Historically, this means that corn is about 25% more expensive than soybeans today.
This would mean that when this ratio corrects to average historical levels, the price of soybeans will rocket. With corn prices at $6.50 per bushel, soybean prices would have to move to $16.25 per bushel! That means soybeans are cheap today at $13, even if those "beans are in the teens."
Last year, China depleted its strategic stockpile of soybeans to keep the price of edible oils under control, and the country is currently a buyer of soybeans to feed its people and replenish its strategic reserves of the commodity.
The demand for animal protein around the world is increasing. The price of live cattle has moved steadily higher from 80 cents a pound in 2009 to today's price of almost $1.30 per pound - an increase of more than 62%! Animal protein production requires soybean meal for feed and demand for cows, pigs, turkeys and chickens are increasing along with their prices. It's simply a question of demographics and growing global wealth. People want to eat better. The Bottom Line This phenomenon is bullish for all grain markets. Corn is the crop of choice this year because of economics but soybean production is bound to suffer. That means the price of soybeans is going to explode.
The supply and demand balance is so delicate these days that even the smallest problem will force prices higher. This is what happened to cotton and we are going to see it in the soybean market very soon.
On February 27, I wrote an article on weather in The Sovereign Investor, which said: "It turns out that to keep a lid on grain prices Mother Nature will to have to cooperate with the farmers. The weather in U.S. could shift, and might yet cause the price of grains to explode later this year."
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Well, U.S. farmers' decision to plant corn in lieu of soybeans may well cause soybean prices to explode, regardless of weather conditions. U.S. farmers are neglecting global soybean demand.
In the not too distant future, farmers and soybean processors stand to make a boatload of cash on soybeans. In commodity markets, history tends to repeat itself.
I believe that "beans in the teens" are here to stay, at least until we break the $20 per bushel mark!
Happy trade hunting... 
Andy Hecht
P.S. Mother Nature is the perfect example of an outside force wrecking havoc on a market. But there are manmade forces that can have the same effect, especially when it comes to advances in technology. These "disruptive technologies" can completely change the way people live, work, and invest. In my latest special report, I'll show you one on the horizon that could herald the "Death of Cash." | |
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