Corn: Bubbling or Bursting?

Demographics shift along with the times and after reading the following article about booming corn prices, I can't help to wonder if some small street in Nebraska will some day soon become the "Wall Street of the Midwest".

For those of you who don't pay attention to commodity markets, corn inventories have hit a 37 year low. Boosting prices over $7, a price range once considered outside the realm of possibility. In spite of today's "pop", there is a realistic potential for corn and other grains to go sky high.

The situation is dire for grains, in general. Global inventories for all grains will drop 13 percent before the next harvest according to USDA estimates. Increasing demand is causing isolated food shortages and accelerating inflation in developing countries even as it boosts farmers' incomes and shifts planting strategies. Considering the recent revolutionary trends in the Middle East this situation may get worse, before it gets better.

Corn is currently $200/acre more profitable for farmers than soybeans, yet they are still struggling to keep up with demand. Increased meat and dairy demands are also helping to drive this emerging corn bubble. Keep in mind that most of America's corn goes into the bellies of feeder pigs and not into supermarkets aisles and shelves.

I remember reading a book at the CBOT about five years ago. There was a great deal of qualitative and quantitative evidence given as to why corn would never go over $6.

Corn is near $7.25, as we speak and many predict it hitting the $8-10 range by 2012. Others are looking at soybeans, wheat and rice as having a greater peaking potential.

Many of you guys had strong opinions on the global warming issue yesterday...yet it seems like very few people are interested in discussing the danger surrounding price spikes in the area of our most valuable commodity.

Food.

Grains, as the first line of defense from hunger,so-to-speak are beginning to enter dangerous territory, price wise.

For those of you who do your own grocery shopping, you must have noticed some very strange looking price changes in the grocery aisles recently. Going to buy a week's worth of groceries is starting to look like a trip to the old time trading pits.

Even my butcher nodded sympathetically when I asked him about Pork Chop Puts earlier this week.

So what is the smart play for the investor here?

I am always inclined to think that we wouldn't be in this situation if it weren't for U.S. farmer subsidies...but perhaps that is irrelevant...or is it?

Are there other reasons to look at?

With all of our talk about silver manipulation, maybe the ag, soft and grain markets should be getting a closer look from regulators?

Will today's pop in the corn bubble be a long term effect or is the bubble just beginning to inflate?

Comments (16)

Feb 23, 2011

Short emerging markets. Food is ~30% of GDP vs developed nations at under 10%.

Feb 23, 2011

Good topic.

These poor nations really need to get a handle (and First World assistance) on their rapid population growth for this very reason. In many circumstances, overpopulation seems to directly correlate to instability, food shortages, famine and warfare in African and Middle East countries.

I'm not really a purveyor (insert: pun) of doomsday theories but this could turn out bad for everyone in due time if the UN and developed nations just sit around and watch portions of the world implode.

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Feb 23, 2011

1.) Nebraska won't be where the Wall Street is. The Ogallala Aquifer is running out of water. Think more like the street that ends at the CBOT.

2.) The world's population is growing and arable land is shrinking. IMHO, corn is as much a long-term issue as oil was five years ago. Developed countries mean meat demand mean even more pressure on grain producers.

3.) Higher grain prices mean more unrest in the developing world. This is ultimately GREAT long-term news for US and European workers. Especially if China goes into a tailspin. The US controls 1/3 of the world's agriculturally productive land- we make Saudi Arabia look like a small-time player in oil when it comes to food production.

I've always liked TR's philosophy of speaking softly but carrying a big stick. The US's domination of the world's agricultural market ensures that regardless of how bearish folks get on our economy and diplomatic standing, we'll always be the quiet power behind the thrones of ~ 1/3 of the world. The situation with corn prices helps make that a lot more obvious these days.

Feb 23, 2011
IlliniProgrammer:

1.) Nebraska won't be where the Wall Street is. The Ogallala Aquifer is running out of water. Think more like the street that ends at the CBOT.

2.) The world's population is growing and arable land is shrinking. IMHO, corn is as much a long-term issue as oil was five years ago. Developed countries mean meat demand mean even more pressure on grain producers.

3.) Higher grain prices mean more unrest in the developing world. This is ultimately GREAT long-term news for US and European workers. Especially if China goes into a tailspin. The US controls 1/3 of the world's agriculturally productive land- we make Saudi Arabia look like a small-time player in oil when it comes to food production.

I say the US needs to form OGEC with Canada and Brazil, block food exports to Iran until the Ayatollah starves, and start limiting food exports to China until they stop manipulating their currency. People who used to claim the US will no longer be a an economic or diplomatic superpower or that Americans are idiots must have apparently have found a new way to go without eating.

1) There are long range drainage systems being built from Lake Michigan, good luck finding details on the subject. Closely guarded subject. No street ends at the CBOT its on Jackson/Clark (i.e. The Daley Triangle). Did you mean the CME and this is a Chicago River reference?

2) Can't agree here unless you mean Palm Oil. Consumable commodities have a far greater inherent value in times of crisis, regardless of market price.

3) This is why militant islamists remain the catch 22 of our times. Try to starve out the Ayatollahs and you get to see full scale Jihad, something that I am not so sure the liberals amongst us are ready to stomach in front of their own eyes.

Muscling China via food supply would be futile, though I like the OGEC train of thought...for two reasons:

1) The Chinese culture is inherently socialist (not necessarily economically, but in terms of the philosophical "for the greater good" sacrificing mentality) and starving out a populous of over a billion is not a strategy that could pan out as quickly as needed, unless you actually want WW3.

2) The plan would require American oligarchs cutting the umbilical with their Chimerican oligopolist dreams. In other words it would require American elites to put "Americanism" over Globalism. I fear that, unfortunately, that ship has passed. If you read between the lines of yesterday's tragicomical discussion on climate control (did you watch the videos, yet btw?) you should see what I am alluding to.

Feb 23, 2011
Midas Mulligan Magoo:

1) There are long range drainage systems being built from Lake Michigan, good luck finding details on the subject. Closely guarded subject. No street ends at the CBOT its on Jackson/Clark (i.e. The Daley Triangle). Did you mean the CME and this is a Chicago River reference?

A drainage system from Lake Michigan would require permits to be issued by Illinois, Indiana, Wisconsin, or Michigan, a violation of the interstate water compact. Regardless, even if interstate transfer of water were on the table, irrigation in the west is quickly becoming futile as a result of soil salinity. Without the wet climate of the Great Lakes region, you get salts building up in the soil and growing corn over decades and decades becomes impossible. Hence, IMHO, farmland in Nebraska and other marginal climate states is worthless even with water- because you can't get rid of the salt that slowly builds up like you can in Wisconsin, Illinois, and Iowa.

So I really do think the fears about Lake Michigan are overblown. Once the water levels come down 5-10 feet and all of that salt gets transferred to arid topsoils, the land that's still farmable with irrigation right now will be rendered completely worthless over ~20 years, further protecting the eastern Midwest from water diversions.

I'm not sure what you mean by no street ending at the CBOT, but when I worked downtown, I remembered a street named after some french guy and had a bank that BofA took over named after it.

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2) Can't agree here unless you mean Palm Oil. Consumable commodities have a far greater inherent value in times of crisis, regardless of market price.

You do agree with me here. Higher grain prices are a long-term phenomenon driven both by shrinking supply and growing demand. Again, good news for the US.

3) This is why militant islamists remain the catch 22 of our times. Try to starve out the Ayatollahs and you get to see full scale Jihad, something that I am not so sure the liberals amongst us are ready to stomach in front of their own eyes.

Largely between Shiites and Sunnis right now. Regardless, they are 5,000 miles away, other enemies- both of ours and theirs- are 200 miles away, and we are their main source of food exports (Russia has stopped shipping food out of the country), we won't see anything worse than maybe another September 11th or two. I think most Americans would be willing to deal with the threat of a potential 9/11 to enjoy 1950s style growth in the economy. And we've got it a lot easier than our grandparents who had global nuclear war hanging over their heads.

2) The plan would require American oligarchs cutting the umbilical with their Chimerican oligopolist dreams. In other words it would require American elites to put "Americanism" over Globalism. I fear that, unfortunately, that ship has passed. If you read between the lines of yesterday's tragicomical discussion on climate control (did you watch the videos, yet btw?) you should see what I am alluding to.

US farmers are hardly oligarchs, and most Midwestern states have restrictions on corporate, non-resident, and large-scale ownership of land. For all the talk of agribusiness in this country, agriculture is still largely controlled by the middle-class, upper-middle-class, and maybe a few public pensions specifically exempted from ownership restrictions. Frankly, there's not a lot of economic efficiency to be gained by allowing large-scale control of land, and it's good to know that when times get tough, at least some of the voting base in the country won't go communist.

Bottom line, folks involved in PWM are going to have to start learning to speak Rural Midwestern and we're going to see a bit of a natural shrinking of the wealth disparity over the next 20 years- unless the folks in Washington decide to screw farmers yet again and start controlling grain exports.

Regardless, this is why I'm not concerned about the loss of rich people if taxes stay below the Reagan levels (50% max tax rates). Rich people have to eat and the US controls most of the world's food exports. So we can always apply the screws to tax havens if we otherwise play relatively fair for a mostly capitalist country.

If this were the 1920s, I'd see a world war coming, but with nuclear weapons, the superpowers all realize that a war would be too risky. Instead what will happen is a lot of Asian countries that depend on food imports will implode over the next 30 years and perhaps some smaller countries with big neighbors will get taken over. Militant Islam will probably turn back on itself as we're starting to see happen in Bahrain and Libya- as long as the US stays out of it- and the outcome will ultimately be roughly the same for the US as it was after WWII. Our foreign competitors will self-destruct and we will see a flattening of the wealth curve. On the one hand, I think it's absolutely terrible. On the other hand, the US gets to enjoy more of the silver lining than the cloud.

Feb 23, 2011

There are a few reasons that the majority of corn goes into rasing cattle and not to the super markets. The majority of corn grown in the USA is not an edible type for humans i.e. it is considered feed corn. There is a reason for this, edible corn, aka sweet corn, is much more labor intensive to produce and requires much more tending to then feed corn does. Plus is produces a lower yeild per acre than feed corn does.

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Feb 23, 2011

glad to see something on corn. I just came back from the national ethanol conference in phoenix (hosted by the RFA aka the ethanol lobby, ethanolrfa.com) - it had about 1500 in attendance, representation from the entire trade.... a few farmers, tons of ethanol plants, biomass plants, biotechs, ethanol marketers and traders, the API (oil lobby) and the automotive lobby (ie GM). Anyhow, I digress - the corn lobby was there and gave a great presentation.

The general consensus is that prices are more sticky for a variety of reasons - that said, the corn belt (and the world) can't afford a year of bath weather next year. Stockpiles are dwindling, more people eating, too much demand for corn from the ethanol industry, etc. etc.

Feb 23, 2011
AVPGuerilla:

glad to see something on corn. I just came back from the national ethanol conference in phoenix (hosted by the RFA aka the ethanol lobby, ethanolrfa.com) - it had about 1500 in attendance, representation from the entire trade.... a few farmers, tons of ethanol plants, biomass plants, biotechs, ethanol marketers and traders, the API (oil lobby) and the automotive lobby (ie GM). Anyhow, I digress - the corn lobby was there and gave a great presentation.

The general consensus is that prices are more sticky for a variety of reasons - that said, the corn belt (and the world) can't afford a year of bath weather next year. Stockpiles are dwindling, more people eating, too much demand for corn from the ethanol industry, etc. etc.

I was hoping you'd chime in on this. Mind elaborating on the "variety of reasons" part? Curious to hear their rationale.

Feb 23, 2011

This is actually a case of our agricultural subsidies giving the US a strategic advantage. Since the Depression the US has been running a cheap food policy at home while supporting the free market overseas. This has had the dual effect of subsidizing the most efficient agricultural producers in the world while penalizing the least efficient. Without subsidies there would be less production now and prices would be even higher. However, these same subsidies made it possible for feed corn to become as large as it has now and we may see a decline in production of cornfed beef and hogs if these high prices continue.

Feb 24, 2011

People have worried of global food shortages and catastrophes for a few centuries now.

http://en.wikipedia.org/wiki/Thomas_Robert_Malthus
But supply has always outpaced demand in the long run (shown by dropping food prices throughout the 20th century.) Any price increase in grain commodities is likely to be temporary, especially with a slowing global population growth rate.

Feb 24, 2011

I was just about to bring that up, Mage. I think we're forgetting the impact that technology and human ingenuity have on this supply and demand structure. There is so much farm science and biology going on right now that none of us even know about yet. Commodity prices are on the upswing, sure, but is there ever a time when they AREN'T volatile? We often seem to forget that volatility cuts both ways, on the increase and on the decrease. I'd be extremely cautious to predict a total change in the global economy based on something as volatile as commodity prices--you'd have to assume they'd be very high for a very long time.

I also recall people saying the same thing about oil only a few years ago--how we were going to see $6 per gallon, and there was no way the West could compete with OPEC, that our economy would choke as gas consumed everyone's budget. Again, many people thought that gas prices would remain constantly high forever. Didn't turn out that way.

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Feb 24, 2011

Guys, we've also seen times when food production hasn't kept up with demand- like the 1930s. The result was WWII.

Part of the reason population growth hasn't been higher over the past 100 years has been wars.

Feb 24, 2011
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