Corn ETF: Seven Forces Driving The Gains In This Crop (CORN, CPO, ADM)

Sean Brodrick:  It’s yellow … it’s precious … but it’s not gold — it’s corn!  While many commodities have taken their lumps in recent weeks, corn continues to hammer its way higher. Take a look at this chart of the Tuecrium Commodity Trust Corn Fund ETF (NYSE:CORN), which holds a basket of corn futures …

corn chart

In the last six months alone, corn is up 24.7%. Compare that to the 3.7% rise in the S&P 500 over the same time period.

7 Things You Need to Know About Corn

Despite that fact that corn has already enjoyed a good run, I’m pretty bullish on corn going forward. Here are seven things you may not know about corn …

1) The USDA recently downgraded its estimate for this year’s corn harvest by 350 million bushels. Corn stockpiles before the start of the 2011 harvest may drop to 730 million bushels, the lowest level since 1996, and inventories will decline further the following year, to 695 million bushels, the USDA estimated on June 9.

2) As dismal as those projections are, the government estimates for the corn harvest are still too damned high, according to Goldman Sachs. The big bank says flooding along the Missouri and Mississippi rivers alone could drown 1 million acres of corn. Goldman says that the corn harvest will probably come in 70 million bushels below government estimates. The bank says that official forecasts for wheat and soybean harvests may also be too optimistic.

“We reflect the impact of delayed planting, poor weather and flooding in lower yield and higher abandonment projections,” Goldman Sachs analysts wrote in a note to clients.

3) Corn has doubled in price in the past year and recently went to a 3-year high after wet weather delayed U.S. planting and demand increased for ethanol and livestock feed. Corn futures for July delivery reached a record $7.9975 a bushel last week on the Chicago Board of Trade, and closed at a 40.5-cent premium to July wheat on June 9. That’s the most expensive spread between the two contracts in 15 years! This, in turn, should boost wheat demand, because wheat can be partially substituted for corn in animal feed.

4) Soaring prices for corn is a major reason why China’s food costs inflated in May by their largest jump in three years. China’s National Statistics bureau said on Tuesday that consumer prices rose 5.5% over a year earlier, driven by an 11.7% jump in food costs. That was up from April’s 5.3% rate. Severe drought and other weather disasters have taken their toll on China’s corn crop. Since corn is a major source of animal feed, this drives up meat prices, too!

5) China is the No. 2 corn producer behind the United States. It produced around 6.2 billion bushels, or 158 million metric tons of corn in 2010. But it’s not enough — despite seeing its corn harvest rise 8% last year, China switched from corn exporter to corn importer in 2010, when it bought 1.57 million metric tonnes, the most in 15 years. Almost all came from the United States. This year, China needs to import at least 2 million metric tonnes of corn, according to China’s Academy of State Administration of Grain.

Analysts are already scoffing at official Chinese predictions of a bumper corn crop this year.

6) The United States is the world’s largest producer and consumer of corn, and is China’s biggest agricultural supplier. America supplied 27% of China’s import market of food last year, reported the Global Trade Information Services. In other words, China needs our grain more than we need Saudi oil.

7) It’s not just China. The popular uprisings that roiled parts of the Middle East including Tunisia and Egypt were fueled by soaring food prices. Egypt in particular is a failed state, and the worsening crisis could impact Egypt’s own food production, increasing its demand for foreign imports to feed its 80 million people.

A Roller Coaster Loaded with Dynamite

Agriculture prices are among the most volatile in commodities. There will be downs as well as ups in corn prices.

There are forces that could drive corn prices lower. For example, the USDA recently raised its estimate of how much of the corn crop is in good to excellent condition, from 67% to 69%. That doesn’t sound like a lot, but in a market this volatile, it was enough to take some of the heat off this week.

And other countries like Argentina can also export large amounts of corn. But add in weather that is hammering farm belts around the planet, and corn has every shot at much higher prices.

How You Can Play This Trend

The CORN fund is already in the Crisis Profit Hunter portfolio, and subscribers should have nice open gains. Other ways to play higher corn prices include Archer Daniels Midland (NYSE:ADM) and Corn Products International (NYSE:CPO).

Whatever you do, do your own due diligence and make sure any investment is right for you before you buy it.

Yours for trading profits,

Written By Sean Brodrick 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, Michael Larson and Bryan Rich. 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.

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