(July 24 2012)
This spring corn has made headlines almost every day as drought conditions in the U.S. Midwest have caused the grain to set record-high prices. So, how can an investor cash in on corn’s rally? There are a few different avenues to take to gain exposure to the grain, including futures, stocks, and funds.
Before we dive into those, let’s take a look at the corn market’s basic fundamentals. The majority of corn is used as livestock feed, but other uses include food, fuel, and a variety of industrial products.
The majority of corn is grown in the United States, where roughly 40% of the global corn crop is produced, in the Midwest Corn Belt. Other top producers include China, Europe, and Brazil. The largest importer of corn is Japan, followed by South Korea.
Corn Price Drivers
Weather is a major price driver of corn. Because weather controls supply, it can have immediate impacts on corn prices. As we have seen recently, extremely dry weather can crimp harvest yields, and cause prices to rally. Overly wet weather can have the same effect. Also, favorable weather conditions, which could result in abundant yields can causes prices to fall. Weather, due to its unpredictability can cause rapid and volatile price swings.
Like all commodities, demand is also a major price driver. Rising fertility rates in Southern Asia, Middle East, and Sub-Saharan Africa are contributing to an ever increasing demand for food. Rising demand for ethanol, a corn-based product has also contributed to the increase in corn prices over the past years, however, this influence is decreasing due to the development of other biofuels.Corn is a dollar dominated commodity; therefore the strength of the U.S. dollar impacts the demand, and in turn the price of corn. When the greenback gains strength relative other currencies, the purchase of corn by these holders of international currencies becomes more expensive, and demand may go down.
The most direct way to invest in corn is by going through the futures markets. Corn futures are traded on the Chicago Mercantile Exchange, with one contract size being 5,000 bushels priced in cents per bushel. The corn futures market is incredibly liquid and tick size (minimum fluctuation) is ¼ of 1 cent. Corn futures are available for the months of March, May, July, September, and December, and carry the symbol “ZC” on the CME Globex and “C” on the Open Outcry (trading floor).Futures contracts are subject to the daily price limits and exchange rules of CBOT.
Gaining exposure to corn in the equity market is possible through a number of different companies involved within the agribusiness sector. Purchasing these stocks does not provide a direct exposure, as corn futures would; however, these more diverse investments could help mediate the volatility that corn prices experiences. Examples include seed producers such as Monsanto, Monsanto produces corn seeds with the purpose of improving the crops properties ideal for ethanol production. Fertilzer companies are another way to gain an indirect exposure to corn, examples include Agrium, The Mosaic Company and Potash Corporation of Saskatchewan. Bunge Limited and Archer Daniels Midland are global agribusiness companies involved in the production and sale of agricultural commodities.
There is currently only one pure-play corn ETF available. The Teucrium Corn Fund (NYSE: CORN). The ETF owns positions in three different corn futures on the Chicago Board of Trade (CBOT): 35% goes to the second-to-expire CBOT corn futures contract, 30% goes to the third-to-expire CBOT corn futures contract, 35% goes to the CBOT corn futures contract expiring in the December following the expiration month following the third-to-expire contract.