Crunch Time For Crops

by: Wall Street Strategies

by David Urani

I want to put on my farmer's hat for a minute to discuss food prices. I suppose one major weakness of us human beings is that we all must eat, and that's why the food market is particularly interesting to me. With a drought of historical proportions sucking the nation's crop harvest dry, food prices are going to play an important role this month-- and perhaps for the remainder of the year. Corn is teetering on new record highs now, at $7.75 per bushel (the record is just under $8.00). Considering the weather hasn't been this bad in decades, you wouldn't want to bet against it falling short of the record. But there's still some hope for farmers, and courtesy of the folks at I have a guideline for how to follow the crop trade:

Generally speaking, August is the cutoff for the crop harvest, when the window for saving plants passes. If we can get some rain before August we have a chance. But if not, then it means the harvest will remain well and truly dead beyond saving. On that note, the next coming of El Nino is brewing, but we aren't sure if it will come before then. Expect continued volatility in the crop futures market for the next two weeks. If it does rain, look for a nice drop in prices. But each day it stays dry, the more prices can continue to spike up (I think we go above $8.00 per bushel in just one or two more days of little rain). Look for big swings in prices up until August, and considering its getting into crunch time, look for some last-ditch trading in related stocks.

Here are some stocks to look out for:

Bullish: Of course CORN, the Teucrium Corn Fund, tracks corn prices and that's a simple trade. Also look for the fertilizer stocks like Potash Corp. (POT), Mosaic (NYSE:MOS) and Rentech (NYSE:RNF) to gain steam as farmers look to feed starving plants.

Bearish: Meat producers that rely on corn and other crops as an input costs tend to get hit bigtime by rising prices. Sanderson Farms (NASDAQ:SAFM), Pilgrims Pride (NYSE:PPC), and Tyson (NYSE:TSN) have definitely been feeling the heat. Also beware the likes of Archer Daniels (NYSE:ADM), The Andersons (NASDAQ:ANDE) and Ingredion (NYSE:INGR) who work with corn as a raw material. And then there are ethanol producers who are getting hit from both the rising input costs of corn, but also low prices on the demand side; those include Pacific Ethanol (NASDAQ:PEIX), Green Plains Renewable Energy (NASDAQ:GPRE) and BioFuel Energy (NASDAQ:BIOF). A word of warning on the ethanol stocks though; they are so down and out that they are apt to see bottom fishing that sends them up high percentages on dead-cat bounces, as they did on Monday.