A drop in corn production will result in reduced supplies of the grain, propelling prices higher over the next few months, experts say.
U.S. corn inventory at the end of the 2020-21 growing season will be 1.3 billion bushels, far lower than the 1.7-billion-bushel level expected by the U.S. Department of Agriculture, says Shawn Hackett, president of Hackett Financial Advisors.
“The USDA’s projection needs to come down,” he says. “The corn market has not priced in a 1.3-billion-bushel carry-over and will have to reprice that reality.”
When that becomes apparent, the grain price could jump to between $5 and $6, Hackett says. Recently, corn futures were fetching $4.57 a bushel on the Chicago Mercantile Exchange, up from a low of $3.08 in early August.
Traders wanting to profit from the potential rally should consider buying July-dated corn futures contracts on the CME. Alternatively, try investing in the Teucrium Corn exchange-traded fund (ticker: CORN), which tracks corn futures prices. It gained 0.5% in the year through Dec. 28, including a 24% rally in the six months through the same date, according to data from Bloomberg via Teucrium.
Part of the story is that bad weather in South America will lead to a later planting of the second corn crop, or safrinha, in Brazil. In turn, that could lead to lower production levels. The crop would normally get planted in February, but extreme dryness in South America delayed the planting of soybeans, which will ultimately have the knock-on effect of delaying the second corn crop.
“The South American soybean crop went in late, and that may mean a diminished second corn crop,” says Sal Gilbertie, founder and CEO of ETF provider Teucrium Trading.
A reduced crop in Brazil is a big deal, as the country is the third-largest corn producer, growing almost 10% of the world crop, according to USDA estimates. It ranks behind the U.S. and China, respectively.
There’s a further issue. Farmers across the globe have a choice about which crops to plant each year, and soybeans and corn are interchangeable. Although farmers typically rotate the crops they grow, they also are influenced by the crop’s current price.
Currently, soybean prices are far higher than corn prices, giving farmers an incentive to choose the former. “Both soybeans and corn need more acres, but only one of them is going to win,” Gilbertie says. “Right now, soybeans will win because their price is higher.”
Given the favorable economics, farmers will likely switch away from planting corn in favor of soybeans. A lower corn supply comes in tandem with increased demand for corn from two sources. First, gasoline consumption has increased in line with the recent rebound in the global economy. And that means more need for ethanol fuel additives, which are made from corn.
Separately, China needs corn to feed increasing numbers of pigs as it rebuilds its hog herd. The herd was ravaged in 2019 by a massive outbreak of African swine fever, resulting in more than 200 million pigs slaughtered.
Investing in agricultural futures contracts is risky, so traders should stay vigilant for market sentiment changes and be ready to exit the investment swiftly. Weather changes can prompt quick reversals in price movements, and that can result in significant losses. In other words, care is needed if you make this trade.
Still, on balance, the odds seem in favor of a rally in prices for the grain over the next few weeks and months.
Write to editors@barrons.com
December 30, 2020 at 06:30PM
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Smaller Corn Crops Mean Higher Prices Are in Store - Barron's
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