As Drought Worsens, Look To Short Crop Insurers

Includes: ACE, AFG, ENH, RE
by: Seven's Report

Grain markets have been receiving a lot of press lately, centered on the explosion in corn prices due to the record heat and drought currently hitting the Corn Belt and midwest. Corn prices have traded sharply higher in reaction to the worsening conditions; with December "New Corp" corn rallying from a low of $5.52 to a high of over $7.70, a run of nearly 40% since early June.

Most traders are reacting to this move and are trying to trade the corn market via the futures or CORN (the corn ETF), but if you're thinking of doing that you better have some nerves of steel. The market is now trading in panic mode, and the amount of investment money pushing into the grain markets is huge, propelling corn higher almost every day. Pardon the simplicity, but the corn market will continue to rally until it stops, and when it reverses it's going to be one very nasty fall. Trading the corn market here, when it's in panic mode, totally flooded with investment money, and dependent on weather, is a gambling move.

If I want to gamble, I go to Vegas, so instead of guessing how high investment funds can push corn, I'm looking for other ways to make money from this situation. The drought in the midwest is real, but it's also been spotty. For instance, farmers in the Dakotas and Minnesota have good crops, but it's particularly been tough on areas of southern Iowa, southern Illinois, and western Kentucky. In those areas, I've read reports that people are truly worried about a failed crop.

Whenever any sort of natural disaster occurs, one place I immediately look for reaction is the insurance stocks (as they're most likely to have to write checks and take a hit). They can be great places to try and lay out shorts as the total bill for coverage escalates. In that vein, I've been looking for companies that provide crop insurance to farmers in those states most effected by the drought, and while there aren't a lot of public companies that provide crop insurance, there are a few.

Everest Reinsurance (NYSE:RE), Endurance Specialty Holdings (NYSE:ENH), ACE Limited (NYSE:ACE), and American Financial Group (NYSE:AFG) are all public companies that provide crop insurance to farmers in those heavily damaged areas, and as such might be more exposed to claims. Now, crop insurance are just a portion of revenues for each of these companies, and these insurance companies share liability with the government (as crop insurance is a federal program) but given the fact that possibilities of failed crops are becoming all the more real, one way I'm looking to make money off of the severe drought is to short these companies with exposure to crop insurance payouts, as the claims will almost certainly have an effect on quarterly profits. It's a lot better than just guessing the next direction of corn, or worse yet, trying to predict the weather.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AGF, RE, ENH, ACE over the next 72 hours.