The Corn Shortage: Ideas for Investors

Based on some alarming global trends and abysmal policy decisions coupled with recent weather-related events in the mid-west, it is evident that high corn prices are here to stay and will likely continue to head north, in fact. While the high prices will spur a conversion to increased planting next year, it is simply too late to react in 2008 and corn prices will continue to skyrocket. There isn't much that can be done to combat the impending corn price spike, but there's an interesting contrarian play here...read on.

Alarming Trends:

Annual ending stocks of corn are continuously decreasing...

Source: Chicago Board of Trade

...While Chinese consumption continues to rise...

Source: Chicago Board of Trade.

Coupled with unprecedented flooding in the midwest...Corn prices have gone parabolic.

Source: Bespoke Investment Group

And don't expect a reversion to the mean in corn prices. Here's why:

A perfect storm in corn shortages was already in store this year prior to the horrendous flooding in the plains. Due to the abnormally cool weather in April and May, corn planting started 1-2 weeks behind the normal start, which already hits yield expectations.

In addition, we're seeing the emergence of an emerging market consumer yearning for meat consumption. Given the corn inputs to produce meat, we're looking at a potential runaway demand situation. Take China for instance. While China has generally been able to produce enough corn annually to satisfy its needs, it looks as though next year may buck the trend and China may become a net IMPORTER of corn. What this means for the global supply of corn is drastically higher prices given their substantial volume of overall global demand.

Source: Chicago Board of Trade

So, how can an investor capitalize on this trend?

If you can access the London exchange, the most direct way without the use of futures would be the ETF CORN. Note that this trades on the London exchange [CORN]. There are other commodity ETFs that contain corn, but given a 3% weighting or something to that effect, they're generally nothing close to a pure play on corn. The Continuous Commodity Index Fund (GCC) has a nice mix of soft and hard commodities as reviewed here, but again, not complete exposure to grains and corn alone.

An interesting link between corn, chicken and meat pricing:

However, there's an indirect way to profit from impending corn prices (or even sustained high prices) which hasn't been priced into the corn futures in my opinion. That would be chicken consumption. Here's why:

• Hog farmers cannot continue to absorb the increased cost of corn and will soon begin passing on pricing in the cost of pork.
• There is currently a herd reduction underway to capitalize on the already high price of pork with the added objective of limiting supply in the future, which further justifies cost increases. This will drive meat prices substantially higher.
• Chicken is the most efficient consumer of corn. It takes only 2 pounds of corn to produce a pound of chicken, as opposed to 4 pounds of corn to produce a pound of pork. This allows chicken producers to increase pricing at a substantially lower rate than pork and beef farmers.
• Given the high meat pricing in relation to chicken, US consumers will start to further substitute pork and beef with chicken, driving increased demand and hence, profits for chicken producers.

While high corn prices seem to be a curse for the entire supply chain, chicken producers stand to benefit from this misery. The play is Tyson (TSN). Obviously, based on a recent share performance chart, this eventuality is not reflected in the market. As this pricing scenario plays out, you'll likely see arbitrageurs enter positions and bid the price up substantially.

It may just be worth considering this play to supplement your commodity portion of your portfolio.

Disclosure: The author has no position in the instruments and equities in the aforementioned article.

Comments

[John Pseudonym]

We farm 5000 acres in a part of Iowa that is NOT in the hardest hit part of the state.

About 10% of the crop is dead from drowning in low lying areas and will not be replanted because it is too late in the season.

The other 90% is several weeks behind where it should be due to late planting, very cold spring weather (temps in the 40's into May) and excess moisture.

If the growing season is perfect from here on out, we will have a decent crop. If not, yields are going to fall dramatically.

If we have an early frost...it will be a disaster!

Given how usually cool this year has been(It dropped to 50 last night), I'm concerned about that early frost..

[redbaron]

The reason that Tyson has not moved up in this high corn market, is that Tyson is no long a pure poultry play. When Tyson purchased IBP a few years ago, it became one of the nations largest processors of pork and beef (if not the largest). And even if it were still a pure poulty play, the benefits are slight IMHO, as they still have to buy grain to feed chickens economically; they can't take it out of the ration completely. I'm watching the stock, but for me to buy it any time soon, it has to move back down to at least the 12-13 range, and I would like it better if it were lower. Again, IMHO

[buyitcheap]

Consider the Ultra ETFs, DAG for long, AGA for double short, mentioned so far exclusively at SA. DBA is a good proxy for the two of them for charting entry points.
I'm going long a big freezer and putting away the prime cuts now...

Best to all...

[ezavo]

take a look at RJA

[LZ]

Holy crap, is there a SINGLE piece of good news out there????

[SeekingValue]

Another possible play here could be sugar. One of the main reasons sodas and other drinks are sweetened with high fructose corn syrup is that HFCS was significantly cheaper than sugar. But with corn prices up so much, sugar becomes competitive if not cheaper. (Sugar prices have been very low recently.) Some drinks have already switched to sugar (Sobe, Jones sodas). If demand for sugar picks up, Imperial Sugar (IPSU) should benefit significantly. IPSU is already a deep value pick (based on short term issues). If sugar demand picks up as a replacement for corn, it could really take off.

[Jerry Dill]

Say goodbye to food prices going down anytime soon!

[Snowbird]

Check out JJG
The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the sub-index of the Dow Jones-AIG Commodity index. The fund is designed to reflect the performance of grains. The index is composed of three futures contracts, corn, soybeans and wheat.

[Everyday Finance]

Wow, TSN crushed today. Now might be the time to play this out. Timing it's tough, but the logic may well exploit the massive pessimism in the sector right now.

[MB Wealth]

In response to "seekingvalue&quo... why not just buy sugar on the ICE exchange whether it be options or futures with a long term view point. We are buying sugar for our clients look at recent reports.

[Daniel Jacome]

TSN is no longer a pure play on chickens (b/c of the acquisitions they have done).......SFD has 4 more percentage pts of the chicken market (25% vs 21% for TSN).....throwing it out there

[Daniel Jacome]

TSN is no longer a pure play on chickens (b/c of the acquisitions they have done).......SFD has 4 more percentage pts of the chicken market (25% vs 21% for TSN).....throwing it out there

[redbaron]

Tyson's earning out today (7/28), and they were down 90% over last year. Ingredient costs from high corn prices just crushed their margins. Earnings were 3 cents per share, vs. expectations of 12 cents. The stock tanked, as also did PPC, but the stocks are still too expensive. How did this idea work out?