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Corn Profits As High As an Elephant's Eye
 The corn is as high as an elephant's eye,
An' it looks like it's climbin' clear up to the sky.
- "Oh, What a Beautiful Morning," Oklahoma!
The U.S. should see a bumper crop of corn this year, but prices sure aren't acting like it. After cratering earlier this year as a too-high dollar choked exports, corn prices are coming back. So should you buy into the bullishness? And if so, how?
I'll answer those questions for you today.
First of all, as with anything agricultural, the final crop will depend on rain. Ask a farmer about rain, and he'll say he has either way too much or way too little. There doesn't seem to be a gentle medium.
Recently, the forecast for 2015 was for corn production to drop 4.4% year over year. But that would still be the U.S.' third-highest corn crop on record.
This big crop comes on top of already well-stocked supplies. The U.S. Department of Agriculture says U.S. corn inventories on September 1 were 1.731 billion bushels, up from 1.232 billion a year earlier.
Well, if the U.S. is having a bumper crop on top of bursting storage, prices are going lower, right? In early September, corn industry officials said prices could drop below production costs.
But that's exactly what didn't happen.
It's true prices tumbled in July as the strong dollar cramped exports of U.S. grain. All else being equal, U.S. farmers find it hard to compete with corn, soybean and wheat growers in countries whose currencies are moving lower.
But corn has spent the past two-plus months forming a rounded bottom pattern, as you can see from this chart...
And in September, corn prices went up on higher volume. This is a bullish shift in momentum. Now, we need to see corn break out above $4 per bushel. If that happens, it could move quickly to $4.50. So what's going on? The fact is, corn is an international market. And despite a high U.S. dollar, the global hunger for U.S. corn is huge.
Here are some things that could affect corn prices going forward.
China's Hunger for Corn
China's corn imports in June jumped 30-fold from a year earlier. And in the first half of this year, China imported 2.65 million tons. That's almost double the volume from the same time a year earlier.
Unfortunately, the bulk of China's corn imports this year have not been from the U.S., but from Eastern Europe.
This is deliberate policy. China believes it became too dependent on U.S. corn supplies. And in 2014, China raised a red flag over an unapproved genetic additive in U.S. corn called MIR162, which is used to fight insects.
For these two reasons, China has broadened its sources of corn.
Five years ago, the U.S. was the source of 97% of China's imported corn. Now, China has signed deals with Ukraine, Russia, Brazil and other suppliers to have a broader base.
Result: The U.S. now supplies just 3.8% of China's imported corn.
The question going forward is, can U.S. farmers win back market share in China?
Well, the U.S. is selling China a lot of corn-based ethanol. According to China's General Administration of Customs, China's imports of DDGS, a byproduct of corn-based ethanol, rose 67% from the previous year to a record 1.1 million metric tons in July. China imported almost all of that from the United States.
Other Global Buyers
While U.S. corn exports to China are choked off, other countries have begun to increase their purchases of U.S. corn. U.S. corn exports to Japan, Mexico and South Korea have grown dramatically.
Of the top 10 importers, three are located in Asia, five in Latin America and two in the Middle East/North Africa. In addition, of these top 10 markets, half have free trade agreements in place with the United States.
For the year, U.S. corn exports are projected to be 47 million metric tons. That's up from 38.6 million metric tons last year. And THAT is a huge support for corn prices.
Poor Harvests Overseas
The U.S. is top dog when it comes to world corn production. China (which consumes more than it grows), Europe, Brazil, Mexico, Argentina and India are all big growers.
But not everyone is having a great year. An erratic monsoon in India is hurting production. Bad weather is weighing on production in Europe and Argentina, too.
Weather is a wild card. Harvests overseas or at home could get worse... or better. And it's that volatility that makes corn potentially very profitable.
Three Ways to Play a Corn Rally
And that's why I think a breakout of over $4 per bushel, if it comes, is worth buying. If corn breaks out, here are some things to consider... - Teucrium Corn Fund (NYSE: CORN). This ETF is exactly what it seems - a basket of corn futures contracts. It has what I think is a very high expense ratio - 2.92%. So keep that in mind before you buy. But it will give you exposure to corn.
- IPath Bloomberg Grains ETN (NYSE: JJG). This fund holds a mix of corn, wheat and soybeans futures contracts. While it has less corn exposure than the Corn Fund, iPath Bloomberg Grains has an expense ratio of 0.75%, which is much more affordable.
- PowerShares DB Agriculture Fund (NYSE: DBA). Corn makes up about 12.5% of this fund, which also includes soybeans, sugar and other agricultural commodities. It has an expense ratio of 0.93%.
If corn breaks out, it could go as high as an elephant's eye. Be prepared to ride that rally.
All the best,
Sean
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