Home > While Corn Prices Soar As The Mid-West Bakes, This Sector Is Poised To Profit (MOO, MON, DE)
Print

While Corn Prices Soar As The Mid-West Bakes, This Sector Is Poised To Profit (MOO, MON, DE)

July 18th, 2012

Tom Essaye: One of the biggest stories in the media over the past week or so has been the tremendous drought affecting the nation’s Corn Belt. The spike in crop prices has been dramatic …

Corn has rallied more than 50 percent since mid-June as the condition and size of the crop is consistently downgraded.


Data Source: Chicago Board of Trade; Bloomberg
Data Source: Chicago Board of Trade; Bloomberg

Drought conditions are some of the worst in nearly twenty years. And it’s a sharp reversal from just two months ago when it was generally expected that the corn crop would be a “bumper crop.”

Just last week, the USDA reduced the expected corn production this summer by 1.8 billion bushels, and reduced the per acre crop yield to 146 bushels/acre this month, from 166 last month.

Trading corn in this market is a risky venture because at the first sight of rain the contract will fall hard, but there’s no telling how high it can go before that happens. Moreover, higher grain prices can impact other sectors in the market, too.

Normally, when grain prices are this high it’s bullish for agricultural equipment manufacturers like John Deere (NYSE:DE). The general thinking is that farmers, with a lot more money in their pockets from the higher prices, will buy new tractors, plow new fields, and upgrade old equipment. But what we’re seeing now isn’t a typical price rise in the grains …

Prices are rising because the general thought is that the crop will be much smaller than anticipated. So while farmers who are lucky enough to have their corn survive will receive a better price, many more farmers will simply have no crop to sell. As a result, we have to be cautious about investing the same old way.

Taking the Contrarian Approach …

As I think about the potential effects of this drought and the investment opportunities, there is one sector in agriculture that will likely benefit — seeds.

Farmers will look to soybeans as a replacement for failed corn crops.
Farmers will look to soybeans as a replacement for failed corn crops.

Farmers are not simply going to let their crops fail without trying to get something out of the ground. Consequently, a lot of them will replant certain fields in soybeans or other crops where corn might have failed. In fact, I’ve read multiple reports of farmers already replanting soybeans where they had just planted corn, in an effort to have something to bring to market at harvest time.

The point is that we can expect increased demand for seeds as we enter the later parts of the summer, and to a lesser extent see an increased demand for fertilizer as well.

In particular, there should be a higher spot demand for drought resistant seeds made by companies like Monsanto (NYSE:MON).

However, if you prefer the diversification of an exchange traded fund, you might consider the Market Vectors Agribusiness ETF (NYSEARCA:MOO). It holds some of the largest seed and fertilizer companies in the world, companies that should benefit from additional demand as unlucky farmers try to salvage what they can from a difficult growing season.

As contrarian investors we must always look at an event in the market from multiple angles, and look beyond the typical response. Higher grain prices due to a drought are not a blanket “good thing” for all agricultural companies. But savvy contrarian investors who look deeper can identify the sectors that do stand to profit.

Best,

Written By Tom Essaye From Money And Markets

Money and Markets  (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, and Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and MarketsMoney and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.


NYSE:MOO


 

Tags: , , , , , , , , , , , , , , ,

Facebook Comments

Comments



  1. No comments yet.
  1. No trackbacks yet.




Copyright 2009-2014 WBC Media, LLC