Corn prices look set to rise over the next few weeks as extreme weather and agricultural pests put a dent in the harvest of the world’s two largest producers of the grain.
“Our estimate is that the corn price reaches $3.80 plus or minus 20 cents in the fall,” says Shawn Hackett, president of Boca Raton-based Hackett Financial Advisors.
In other words, corn prices could easily reach $4 a bushel, or about 24% higher than recent prices of around $3.22.
Traders wanting to profit from the likely surge in prices should consider purchasing December-dated corn futures on the CME futures exchange. Alternatively, investors can try the Teucrium Corn Fund exchange-traded fund (CORN), which holds a basket of corn futures.
This year, futures prices for U.S. corn have taken a bashing, falling around 18% since the beginning of the year, when a bushel of the grain would fetch $3.92. That drop occurred because many traders believe that there will be a bumper harvest in the fall.
But experts say the expectation of a plentiful harvest may not get realized. That is because of problems in the U.S. and China. Together the two produce more than 600 million metric tons of corn annually, or more than half of the approximately one billion global supply of the grain, according to the U.S. Department of Agriculture.
The U.S. issue is that high temperatures and dampness are likely stunting the growth of corn plants. “Our thesis is that June and July record warm, humid temperatures at nighttime will have reduced corn yields,” Hackett says. “Pollination needs cool nights, and when the air doesn’t cool down it tires the plants and reduces corn yields.”
Excessive heat hasn’t helped either. “June/July temperatures for the corn belt achieved 40-year high [only seen a few times since 1980],” according to a recent Hackett Financial report. “This strongly suggests that corn yields will be below trend line.”
So far this view hasn’t been reflected by the market, Hackett says. But that is just one issue. Separately, China is experiencing massive floods combined with an infestation of a voracious pest: the fall armyworm (FAW), which loves hot damp weather and destroys crops, including corn.
[It is] highly likely that the pest [FAW] will establish itself in Northeast China, the largest corn producing region in China,” a USDA report from earlier this year stated. “[…] some industry contacts and academics predict the country will suffer a corn deficit and corresponding soaring prices this year.”
The Chinese government takes a more cautious tone due to the pest, suggesting only a small (2.5%) fall in the crop, the USDA report says. But a modest forecast drop in the harvest could easily turn out to be a far larger shortfall in reality.
More importantly, Chinese market corn prices are indicating that something is likely to be wrong with this year’s crop. When converted from local currency corn in China was recently fetching around $8 a bushel compared with $3.22 for U.S. corn. “Their markets are telling us the Chinese have a problem,” says Sal Gilbertie, founder of ETF provider Teucrium.
“Last month China bought a record amount of corn from the U.S., because they need it,” Hackett says. And he notes its better to buy U.S. corn at about $3 than Chinese corn at $8. If China continues buying heavily from the U.S., the demand will help pull up U.S. corn futures prices.
There are risks in making the trade. Forecasting the weather and its crop yields is always tricky. The harvests in the U.S. and China may turn out to be more favorable than expected.
Nevertheless, the odds of a rally make buying corn futures a worthwhile risk this year.
August 06, 2020 at 10:31PM
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Corn Crops May Not Be Bountiful This Fall. Corn Prices Are Rising. - Barron's
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