How High Is $9 Corn?

 |  About: Teucrium Corn ETF (CORN)
by: Chris Ridder, CFA

The USDA released its latest corn crop estimates today in its WASDE report. It reported an average yield per acre of 123.4 b/a, which was a significant drop from the July estimate of 146 b/a. I had written about a potential large drop in an article a week ago. This drop in yields caused the USDA to report:

Ending stocks for 2012/13 are projected at 650 million bushels, 533 million lower and the smallest carryout since 1995/96. The 2012/13 season-average farm price for corn is projected at a record $7.50 to $8.90 per bushel, up sharply from the $5.40 to $6.40 per bushel projected in July. (my emphasis)

Wow, a record farm price of $7.50 - $8.90, which I will round up to $9.00 even. However, this is priced in nominal terms -- it is not adjusted for inflation. Below is a chart from 1866 to 2011, which shows the average farm price adjusted for inflation:

(click images to enlarge)

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One can see that in real terms, that in prices adjusted for inflation, a price of $9 for corn is not all that high historically. This year produced the largest acreage of corn planted since 1937; but when one looks at the 1936 price of corn -- the price that farmers based their 1937 plantings on -- it was much higher at $16.70 (I used 2011 inflation index data to adjust previous years, i.e. 2011 is the "base" year).

The "green" revolution in agriculture, which began to occur in the mid 20th century, greatly increased the productivity of farms. This led to more supply and a lower "real" price of corn. But since 2004, there has been no consistent trend higher in yields.

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With the 2012 corn yield lower than any of these years, the price of corn is rising both in nominal and real terms. High prices scare some traders, but when looking at inflation adjusted prices, there still is more upside potential in real terms.

Traders can use the ETF CORN to trade the corn market if they do not have a futures account. It opened slightly lower after running up two days into the report, and, as of this writing, is now about unchanged after 20 minutes of trading. I am looking to be a buyer based on technical patterns or any significant dip until next year.

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