Agriculture ETFs: Higher Corn Market Prices Will Hit Your Wallet (CORN, MOO, DBA)
David Zeiler: A smaller-than-expected U.S. fall harvest, combined with strong demand, has sown the seeds of higher corn market prices. That will inflate your grocery bill, but it’s also an investing opportunity that should persist into next year according to some experts.
The United States Department of Agriculture (USDA) recently reduced its forecast for the fall corn crop to 12.9 billion bushels from 13.5 billion based on damage from spring flooding and summer drought in several key corn-producing states.
Midwest temperatures averaged eight degrees higher than normal in July, while some areas got less than a third of their normal rainfall.
“Corn is dead on some of the sandiest ground and looks more like the middle of October than mid-August. The corn crop is pretty much a done deal,” Mike Mawdsley of broker Market 1 told Agrimoney.com.
In addition to lowering its estimate for the fall harvest, the USDA has also lowered its quality rating of the U.S. corn crop. The USDA had rated 70% of the corn crop “good to excellent” as of June 26; that number fell to 60% on Aug. 14 and was revised down to 57% on Monday. Last year, 70% of the corn crop was rated good to excellent.
Many experts believe the USDA has only just begun to downgrade.
“The USDA crop forecast should …still prove too optimistic, despite the downward revision already made in August,”Commerzbank analysts said.
Another group, MDA Information Systems Inc., has already undercut the USDA’s harvest estimate. MDA forecasts a corn crop of just 12.23 billion bushels.
The ever-worsening harvest forecasts have steadily pushed corn market prices higher.
The price of corn has soared 70% in the past 12 months, with futures for September and December delivery well north of $7 a bushel. September futures on the Chicago Board of Trade (CBOT) rose to $7.29 on Tuesday, while December futures rose to $7.42.
That’s bad for consumers. Corn is the single-biggest cause of increases in food prices, which are expected to rise 4% for 2011. Analysts expect higher corn market prices to help push retail food prices up another 4% next year.
Because corn is so widely used, demand is not likely to slacken – despite the higher prices.
“Even with a global slowdown, the last thing people will stop buying is food,” David Smoldt, a vice president of operations at INTL FCStone Inc., told Bloomberg News.
Corn is found in about a quarter of the products you buy at the grocery store and is widely used as animal feed. About 40% of the U.S. corn crop is used to create the fuel additive ethanol. And about 15% of it is exported to other countries.
Standard Chartered analyst Abah Ofon told Agrimoney.com that he sees demand from Japan rising and ethanol production in the United States increasing, both of which will put more upward pressure on corn prices.
“We believe the USDA has underestimated the corn end-season stocks,” said Ofon. “There is further value along the corn futures curve into the first quarter of 2012.”
The Commonwealth Bank of Australia foresees prices rising in the months ahead to as high as $8 a bushel.
Investors can cash in on higher corn market prices by using such agricultural exchange-traded funds (ETFs) such as PowerShares DB Agriculture Fund (NYSE:DBA) and Market Vectors Agribusiness (NYSE:MOO).
For a pure play on corn, there’s the Teucrium Corn Fund (NYSE:CORN). That fund is up more than 21% since July 1.
“The grain fundamentals specifically are quite tight still, and that’s showing itself in the market,” Christopher Gadd, an analyst at Macquarie Group Ltd. in London, told Bloomberg News. “The belief out there is that there’s a problem in corn. We’ve seen corn prices supported because there’s talk of lower yields in the Midwest.”
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