Decoding the Surge in Corn Prices and ETF Investment Opportunities

 |  Includes: ADM, BG, CORN, DBA, INGR, MOO
by: World Market Pulse

An increased demand from emerging markets and a smaller-than-anticipated U.S. harvest helped the corn market closed firmer on the strength in wheat and on dollar weakness. Trade expectations for USDA to lower the US corn yield in the November crop production report have also acted as a catalyst for the surge in Corn futures and corn related investment options across the trading spectrum.

U.S. corn futures at the Chicago Board Of Trade, CBOT, ended up, underpinned by supply/demand outlooks and spillover support from Wheat. CBOT Dec corn ended 3c or 0.5% higher at $5.82 a bushel. Market participants are worried about tightening global supplies of feed grains, but export demand for U.S. corn has suffered as buyers slowed purchases since prices reached two-year highs. End of month positioning helped buoy prices, with strength in wheat for most of the day aiding price strength.

Falling US Dollar: The US dollar has been under immense pressure in recent times and not only witnessed its worst month since May 2009 against a basket of currencies, but was sliding lower relentlessly on speculation that the Federal Reserve would have to embark on a further stimulus program to liven up the flagging US economy. It was then not much of a surprise that as the dollar weakened, commodity prices witnessed a surge in the recent past.

Low USDA Corn Estimates: Corn futures had earlier climbed after the U.S. Agriculture Department estimated the domestic corn crop would fall 3.4 percent from a year earlier, the second reduction to its forecast in as many months. The grain is the primary ingredient used to make ethanol in the U.S. The USDA was projecting a record corn crop as recently as August, but farmers have been disappointed as the harvest progressed. The plants suffered from excessive early-season rains that washed away nitrogen, a crucial nutrient. Crops also were stressed by unusually hot overnight temperatures during the summer as USDA shaved a record 6.7 bushels per acre from last month's corn-yield estimate, and now projects 155.8 bushels an acre from the national harvest. The consensus among analysts was for 159.9 bushels an acre.

In the two weeks following the USDA report, corn prices surged more than 25%. Analysts say the next USDA report - due Nov. 9 - could set off another spike, as the United States harvests two-fifths of the world's corn and accounts for nearly 60% of global exports.

According to analysts of Newedge USA, the trade will continue to monitor the disappointing US corn export sales and shipment pace to determine if downward revisions in US corn export projections will be warranted. Recent competition from South America has slowed US corn export sales activity. The trade will be somewhat reluctant to lower US corn exports; awaiting potential Chinese or FSU drought related import activity, although improvement in sales and shipments will be needed in upcoming weeks. Analysts expect the corn market to continue to find good underlying support ahead of USDA’s November crop production report on ideas that USDA will lower the US corn yield, further tightening the US corn supply situation.

Corn Prices Driving Rice Interest: Commodity traders and market experts are said to be keeping a keen eye on the prices of both rice and corn as experts feel that the rising corn prices could act as a catalyst for the rice industry with a possible increase in demand for rice as animal feed in the coming weeks. Corn futures have surged to two-year highs as lower-than-expected yields from the fall harvest ignite concerns over supplies for the coming year.

Corn Driving Ethanol Surge: According to Bloomberg data, Volatile corn prices and bad bets on the grain contributed to the bankruptcy of at least a dozen ethanol producers over an 18-month stretch that started in October 2008, which included VeraSun Energy Corp., once the largest American distiller. But with ethanol at these prices, producers should buy corn right now to lock in margins and hedge against corn prices going higher over the next several days.

Corn investment options:

While companies such as Corn Products International Inc. (CPO), Archer Daniels Midland Co. (NYSE:ADM), and Bunge Ltd. (NYSE:BG) stand to benefit from rising food costs, particularly increases in the price of corn. As far as the Exchange Traded Fund's are concerned the Teucrium Corn Fund (NYSEARCA:CORN) seeks to track the price fluctuations of corn while the Market Vectors Agribusiness ETF (NYSEARCA:MOO) and PowerShares DB Agriculture Fund (NYSEARCA:DBA) offers broader exposure to the agricultural sector.

Corn Fund (CORN): The underlying holdings of this fund consist of corn futures contracts traded on the CBOT.
Expense Ratio: 1.00%

Market Vectors-Agribusiness ETF (MOO): The Index provides exposure to publicly traded companies worldwide that derive at least 50% of their revenues from the business of agriculture. As such, the Fund is subject to the risks of investing in this sector.
Expense Ratio: 0.59%

PowerShares DB Agriculture Fund (DBA): The Index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities. The Index is intended to reflect the performance of the agricultural sector.
Expense Ratio: 0.75%

Disclosure: No positions