Two Plays to Short Corn
Before getting started, let’s go over the two recommended plays. While there are other ways to get exposure to a short corn position, I recommend taking positions in one or both of the exchange traded notes (ETNs) below.#1 Teucrium Corn (CORN): I now own and recommend playing near-the-money puts on CORN. While the preferred expiration is February 2012, I anticipate shares or units of CORN will begin to come down sooner than later. That said, I strongly recommend that you play it safe and give yourself plenty of time.
#2 PowerShares Agriculture Double Short ETN (AGA): I recommend buying shares of AGA at or near $15. Plan to exit this position in six or fewer months at/near $30. AGA is an ideal play for those who are (1) less familiar or comfortable with options and/or (2) managing your own retirement accounts - IRA, Roth IRA, and 401K.
After entering these positions, immediately set your sell prices, be patient, and hang on.
Refer to the two weekly charts below.
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Preliminary Note
I urge readers to first review my three-part series on CORN that was featured here at Seeking Alpha last week. So far, the series has received a total of 9,300 views. Thank you to those who read it.
- The Big Move (Part 1): The Corn Correction Of 2011
- The Big Move (Part 2): Playing The Corn Bubble With These 2 ETFs
- The Big Move (Part 3): The 2011 Corn Bubble Will Burst
In this article, I wanted to share some recent developments with you that support my short CORN case.
I argue that we’re witnessing a CORN bubble and prices are likely to come down in the near future. On the other side, the CORN bulls argue, inter alia, supply constraints will continue to keep the price of CORN at all-time highs.
I. U.S. Crop Production Report for 9/12/11
In a September 12 update, Bruce Blythe, Business Editor at Drovers CattleNetwork did a nice job of summarizing the USDA report. I encourage readers to take a moment to review Blythe’s report.
In his report, you will find that other investors and market participants also share the sentiment that I expressed about CORN in my three-part series, supra.
Matt Maloney, a corn futures broker with R.J. O’Brien & Associate in Chicago and some others say corn prices may have established a near-term peak with the multiyear highs attained in August.
“Clearly, the heat damaged” the crop, said Mark Soderberg, an agricultural risk manager with Archer Financial Services in Chicago. “But harvest results I’ve heard so far are not as discouraging as the market feared.”
“We’ll be hard-pressed to rally corn back to those highs and take those highs out unless we see further production cuts in subsequent reports,” Soderberg added.
Bottom Line: While CORN is trading at/near all-time highs, I firmly believe supply issues have been priced in.
II. Demand Destruction
High prices destroy demand. End users find more affordable substitutes. Once demand dries up, it doesn’t tend to come back quickly.A grain trader with a top four grain firm, who I spoke with this week, explained:
Once we get past supply concerns, demand will be the deciding factor ... With supply as tight as it is, demand must be price destroyed which we're seeing now. [Once destroyed], it takes a while to build back up again.
Evidence of demand destruction can be found in weekly grain shipments. Similar to 2008, rail grain shipments have nose-dived this year. The chart below really says it all.
On September 9, Joe Weisenthal of Business Insider noted:
But this chart really stood out for us, because we remember earlier this year, when there was tons of talk about a huge grain boom.
Now look at the golden yellow line. Now only have weekly rail carloads of grain dropped sharply from the beginning of the year, but they've dropped during a period when (seasonally) shipments have usually risen.
(Click to enlarge)
Conclusion
Following the impressive 12-month run that we’ve seen in CORN prices, I think it’s appropriate to close with a quote from a song written and performed by the late Jim Morrison and The Doors:This is the end.
My only friend, the end.
Of our elaborate plans, the end.
Of everything that stands, the end.
No safety or surprise, the end.
Don’t folks have a sense of humor anymore? I’m only kidding.
All jokes aside, I firmly believe that CORN prices will begin to fall sooner rather than later as demand dries up. The two positions that I’ve highlighted above should enable investors to capture CORN’s big move - down.
Disclosure: I am short CORN via put options.
