How to Play Sky-High Corn Prices Without Getting Tangled Up In Messy Futures Contracts
With corn prices skyrocketing in disastrous drought conditions, investors have been piling into the most obvious way to invest in corn: the Teucrium Corn Fund (CORN).
That’s impressive, sure. And while corn hogs the attention, some other grain-focused ETFs have done even better:
But long-term investors here are likely to trip. Besides the fact that grain prices presumably won’t go straight up forever, commodity exchange-traded products have complicating factors like contango, which Bloomberg described best in its 2010 expose.
Contango in short: When the front-month futures contract expires and investors roll over their position to the next contract, there’s cost involved, particularly when the next contract costs more than the front-month. If you followed and understood that, go ahead and trade your corn fund with gusto.
But if you didn’t, the point is that this stuff gets complicated fast – and you might be better off sticking with stocks. Agriculture stocks are an imperfect proxy for commodities as they’re of course affected by all sorts of other factors besides weather, supply and demand. But if you buy into the argument that a growing population requires more of our current cuisines, stocks may be a better long-term play. Here are some to consider.
When it’s time for any non-withered corn to be harvested, farmers will get out their modern combines, which are a far cry from the original farm plows. Farms are getting bigger, and farmers are buying bigger equipment. The Association of Equipment Manufacturers says farm tractor retail sales climbed 5.4% in June, and those with 100 horsepower or more rose 24.5%.
As Bloomberg Businessweek recently described, farmers with thousands of acres to work are willing to spend more to get Deere’s fancy but brutal equipment. That has helped it pay a healthy dividend, and the dividend yield could be expected to grow for those who buy now because Deere is a company that increases its dividend over time.
The drought could mean fewer farmers buying tractors and other machines next year. That's a suggestion Deere disputed when announcing quarterly results, but it could also push down these stocks to attractive levels for long-term holders.
Even when the weather smiles on farmers, their miles upon miles of corn are barely edible and need to processed into high-fructose corn syrup, ethanol, and cattle feed. The top agriculture processors are known as ABCD: Archer Daniels Midland (ADM), Bunge (BG), Cargill and Louis Dreyfus.
Processors have been under pressure, some of it self-inflicted. In ADM’s case, a big bet on ethanol has put it in a bind. As YCharts recently explained, it’s paying more for corn and making less from ethanol. At Bunge, the world’s top oilseed processor, lots of soybeans have made for thin margins. But they may be deals: YCharts Pro service rates both as attractive.
Seeds and Fertilizer:
No matter how terrible the situation is for farmers this year, odds have it there will still be farmers around to put seeds in the ground next spring. For that, many will turn to Monsanto (MON), DuPont (DD) and Syngenta (SYT).
Monsanto’s been working on genetically modified drought-tolerant seeds. While a scientific group has gone on record as skeptical those seeds really work, expect next year’s farmers to be willing to try almost anything to avoid seeing their crops die from drought, again.
As for fertilizer:
They’ll still need that next year, too. And this year -- anyone who still has corn growing wants to get as many kernels as possible.