U.S. farmers are experiencing an unprecedented excess amount of corn at this time of the year thanks to months of wet and rainy weather, ideal for high quality corn harvests. Corn is not likely to be in high demand internationally or nationally this year either, at least not enough to offset the glut of supply.
This has caused corn prices to drop by about 13% this year, the lowest in four years, even after a 40% drop last year. According to the Wall Street Journal, September futures, next month’s contracts, jumped by about 1% to $3.6575/bushel on Friday, 15th August. At the same time, futures contracts for December rose 0.7% to $3.7625/bushel. The Corn ETF (CORN - ETF report) has also taken a beating since corn process plunged, and is arguably a good way for retail investors to make a directional bet on the corn market if they do not have a futures account.
Many corn producers and farmers have high hopes for corn users such as ethanol producers and animal feed to seize the buying opportunity, and purchase more corn. There is not much substance to this though, as ethanol production has only been 14.4 billion gallons this year. Corn used in animal feed is only around 5.3 billion bushels.
Considering how ethanol production has been relatively stable, and how corn used in animal feed hasn’t increased as fast as corn production, it would be wise for corn producers to start curbing their production perhaps for next year, especially since sales to China, the biggest buyer, have not been very high.
(chart courtesy of WSJ)
The plunge in corn prices has motivated many investors and traders looking to profit in the near future to write some September and December futures contracts. It is also worth pointing out that a commodities broker at Paragon Investments is confident that corn futures will fall below $3.20/bushel and that investors should shy away from corn futures this coming winter, so some clearly believe that more pain is ahead for corn.
Many traders are holding their breath for the Pro Farmer tour this week, an agricultural news and information service that visits corn farms across the Midwest in the US before assessing and determining the average yield/acre. This can cause corn prices to shoot up, or worse, to continue climbing down.
Time will tell, and the wise investor would be better off investing (longer-term) in other commodities in the interim. Some interesting choices could be in the precious metals market as Gold (GLD - ETF report) or (IAU - ETF report), Palladium (PALL - ETF report), or Platinum (PPLT - ETF report), may be solid picks if the markets in Europe and Russia remain unstable.
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