Corn ETF Plays

Includes: CORN, DBA
by: Chris Ridder, CFA

There has been a lot of discussion over the last few years about asset allocation into commodities and whether the bull market in commodities will continue. One of the most popular commodities to trade futures in is corn.

The bullish side presents among its reasons to be long as:

  1. Demand from emerging markets
  2. Low supply
  3. Demand for ethanol

The bears counter that high prices will create more supply and that ethanol subsides might be cut. In fact, on June 30th, it appeared that the bears might be on the verge of victory when it was reported by the USDA that the March 2011 planting report had grossly underestimated that amount of acres planted and this was corrected in June, as discussed in this Seeking Alpha article.

However corn prices have now sharply reversed this sell off. As I write, corn futures closed up 4% (December contract) in response to July 12th's release of the most current World Agricultural Supply and Demand Estimates

(Click to enlarge)

The CME Group gives its mid-session update, from July 12, as follows (link):

"U.S. ending stocks for 2010/11 were pegged at 880 million bushels, versus 730 million last month but below expectations for around 965 million. For the 2011/12 season, ending stocks were pegged at 870 million bushels, up from 695 million bushels last month but below trade expectations near 1.095 billion. This resulted in a 6.4% stocks/usage ratio, which is above last year and above last month's estimate but is still the 2nd lowest level since 1995-96. Yield was left unchanged from last month at 158.7 bushels/acre. While planted area was revised up by 1.6 million acres to 92.3 million, and harvested area was revised up by 1.7 million acres to 84.9 million. As a result, production came in at 13.47 billion bushels, up 270 million from last month. Usage for feed and for ethanol and exports were all revised higher. World ending stocks for the 2011/12 season came in at 115.66 million tonnes, up from 111.89 million tonnes last month but down from 120.88 million for 2010/11. This results in a 13.2% world stocks/usage ratio, which is still the tightest since 1973."

One can see the potential for another leg up in the bull market with the tightest stocks in almost 50 years. Currently, the USDA has the yield set at 158.7 bushels/acre, which I believe is a trendline regression of the last 5 years. However, last year's crop had a yield of 152.8 bushel/acre and when one looks at the crop progress last year at this time, 73% of the corn crop was in the good/excellent category and currently this year 69% of the crop is in this category.

This means this year's corn crop needs perfect growing conditions to meet and/or exceed the trendline plug in yield. It is well know that planting was delayed because of heavy rains this spring, and this is shown in the percentage of corn in the "silking" stage of 14% currently, 36% last year, and 26% five year average.

I subjectively weigh the odds in being in favor of another upmove in corn since the weather has to cooperate almost perfectly. Now I started trading corn 18 years ago and weather markets are very difficult to trade. Expect limit up and down moves. This trade/investment is highly speculative even if the fundamental economics appear beneficial.

There is now a corn futures ETF, with the symbol CORN, so a speculative trader/investor no longer has to open a separate account to trade futures. A few details about this ETF can be found here. The CORN ETF has listed options on it which I have traded in the past and found them not to be very liquid, so use limit orders. There is also the more familiar ETF DBA which has a corn allocation among other things. I plan to have corn on the cob more often, being able to kill two birds with one stone; filling my stomach and supporting my financial position!

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CORN, DBA over the next 72 hours. I am long December Corn futures and options