By Stoyan Bojinov
Corn is one of the oldest crops known to man. The Aztecs and Mayans cultivated the grain and helped popularize it as a staple crop in the Americas. Corn continues to be a main source of food for people today, and in fact, it is thought to be the second most cultivated plant in human history behind wheat. The yellow grain holds a fundamental role in the agriculture industry, serving as both a staple crop for humans and a necessary ingredient for livestock feed as well. Increasing populations and developing economies have contributed to an ongoing increase in food demand, thus broadly raising the prices of most agricultural commodities over the past few years. Rising fertility rates in regions like South Asia and Sub-Sahara Africa are contributing to the growing demand for food. While emerging economies, like South America, are contributing to an also rising demand for meat, which further increases corn demand, given the grain's functionality as both food and animal feed. Sometimes referred to as the “other” yellow-gold, corn continues to play a vital role in modern economics, serving as a source of food and alternative-energy.
Physical Properties And Uses Of Corn
The majority of the crop is used as livestock feed, while the rest is used in a variety of industrial products including ethanol fuel in addition to popular food items like corn cooking oil, high fructose corn syrup, and cornmeal. Corn and cornmeal (ground dried corn) are the staple foods of many countries. From a nutritional standpoint, the crop is a major source of starch and essential for many baked goods and cereals. Many African nations use the grain to cook up a thick porridge, while South and Central Americans use it to make tortillas. Corn flakes are also a popular breakfast in North America and Western Europe, while some have even fermented the grain to produce alcoholic beverages.
Corn has a high viscosity (resistance to flow) when ground into a paste, and this gel-like property makes it useful in the production of paper products and adhesives. Corn is also a major source of carbohydrates that are useful in the production of pharmaceutical products, including aspirin and a multitude of antibiotics. Corn also plays a role in the automotive industry since it’s used to produce ethanol, tires, and even spark plugs. This trend could continue as ethanol is gaining popularity and alcohol-based fuel is seeing increasing demand, especially as oil prices continue to rise making the product more attractive to many users.
Corn is also used in paints, dyes, toothpaste, cosmetics, beer, whiskey, explosives, solvents, anti-freeze, and soaps. The grain is also a part of major academic research focusing on its usefulness in the fields of genetics and biochemistry.
Corn Supply And Demand
Corn is produced on every continent around the globe except for Antarctica. The United States accounts for roughly 40% of global corn production, and the Midwestern Corn Belt plays a key role in impacting the global supply outlook. Other top producers include China, Brazil, India, Mexico, and Europe.
The top producers, exporters, and importers are given below (units are in 1000 Metric Tons)
Corn Price Drivers
Although the price of corn is heavily correlated with the performance of the grains group as a whole, it still bears its own unique characteristics that impact its price movements. There are several factors that can impact the price of corn; below we have outlined some of the biggest and most important:
- Demand for Corn-Based Ethanol: Recent research shows that rising demand for ethanol has accounted for roughly 35% of the increase in corn prices since 2007. Alternative biofuels are on the horizon, and developments from sugar cane, grass, and sugar beet could very well threaten the demand for corn based ethanol. However, for now, corn based ethanol is the cheapest biofuels available and it’s likely that demand will continue to increase, especially when considering rising oil prices as well.
- Strength of U.S. Dollar: The United States is a top producer of corn, and likewise the dollar’s strength plays a key role in impacting both the demand and price of corn. When the U.S. dollar depreciates, net exports go up, since it’s cheaper for foreign buyers to purchase U.S. goods.
- Government Regulation: Brazil has developed a successful sugarcane based ethanol, and its popularity and relative efficiency has made biofuels gain more attention as a whole. However, little of this reaches American soil as there is currently a tariff on imports of Brazilian ethanol, which is a means of encouraging domestic production and use of corn-based ethanol. Legislation in California and New York (other states pending) requires that gasoline at the pump contain 10% ethanol, since it is a form of renewable energy that is relatively cost and environmentally friendly.
- Emerging Market Demand: Rising fertility rates in Southern Asia, Middle East, and Sub-Saharan Africa are contributing to an ever increasing demand for food, simply because our world population is growing as a whole. A second factor that is likely to push corn prices upward is a rising standard of living in developing nations. As people’s income rises, the consumption and demand for meat products increases as well. Nearly half of all U.S. produced corn is used for livestock feed, and thus the price of corn is likely to appreciate as demand for meat increases.
- Weather Conditions: The most basic price driver with any commodity is supply, and with corn, weather is the underlying variable that impacts production. Extremely wet or dry weather conditions hurt harvest yields, and likewise price increases due to the tightened supply. Likewise, favorable weather conditions could result in abundant yields, causing supply to increase and prices to fall.
Investing in Corn
Corn may have appeal as an investable asset for several reasons. As a staple crop, corn holds an important part in our everyday lives and is used in everything from food to industrial products. Commodities are an attractive asset class in an inflationary environment, serving as a hedge, while further demand from emerging markets is also driving the price of corn higher.
There are a variety of options for accessing corn, including futures, stocks, and ETFs:
Corn futures are traded on the Chicago Mercantile Exchange, with one contract size being 5,000 bushels (about 127 metric tons) priced in cents per bushel. The corn futures market is incredibly liquid and tick size (minimum fluctuation) is ¼ of 1 cent.
Corn futures are available for the months of March, May, July, September, and December, and carry the symbol “ZC” on the CME Globex and “C” on the Open Outcry (trading floor).
Futures contracts are subject to the daily price limits and exchange rules of CBOT.
Gaining exposure to corn in the equity market is possible through a number of different companies involved within the agribusiness sector.
- Bunge Limited (NYSE:BG) and Archer Daniels Midland Company (NYSE:ADM) are global agribusiness companies involved in the production and sale of agricultural commodities. Much like metal mining companies, these corporate farmers have relatively fixed production costs, and their profitability is linked to the prevailing market price of corn to an extent. However, keep in mind that these companies have tremendous diversification across international markets and product lines (edibles and industrials), and likewise their performance is not always correlated with the price of corn.
- Monsanto (NYSE:MON) and DuPont (DD) produce genetically engineered corn seeds with the purpose of improving the crop's properties ideal for ethanol production. If demand for ethanol continues to push the price of corn higher, then farmers will need to bump up their protection to meet demand, and likewise purchase more seeds.
- Mosaic Company (NYSE:MOS) and Potash Corporation of Saskatchewan (POT) are manufacturers of fertilizer, and if corn demand increases farmers will require more crop nutrients to improve harvest yields.
There is currently only one pure-play corn ETF available. The Corn fund (NYSEARCA:CORN), issued by Teucrium, offers futures-based exposure to the price of corn, however unlike many other futures-based funds, this one does not invest exclusively in near month contracts. Instead, this fund is designed to appeal to buy-and-hold investors, by spreading out exposure through multiple futures contracts expiring in different months, helping to tame overall volatility and cut down on contango issues.
Investors looking for more broad-based exposure should consider JJG and GRU, as these funds offer diversified exposure within the grains segment of agricultural commodities.