Should You Buy CORN?

June 14, 2010

As the first pure-play corn ETF launches, should you take a second look at the yellow grain?



The Current State Of Corn

On Tuesday, June 8, the Teucrium Corn Fund (NYSEArca: CORN) began trading, marking the first time ETF investors have had a pure play on the most important crop in the United States.

Lara Crigger covered the launch in a recent podcast, pointing out a few key features of both the ETF and the corn market, but I thought we'd dig a bit further below the surface.

So, first things first: How's corn doing right now?


Long-term Corn


Over the past year, the short answer is "not so hot." Corn futures have fallen far below their mid-2008 highs and are sitting even lower than last year's average.

The reason for this underperformance is twofold: Economic growth hasn't really kept pace with projections, thus muting demand; and corn farmers have had a spectacular crop year. Sure, there's always the back and forth about the weather, but according to the World Agricultural Outlook Board, ending stocks this year should be just slightly lower than last, at 1.6 billion bushels. And not only did farmers plant more corn this year (86.5 million acres, vs. last year's 86 million), but they are harvesting 1 million acres more than they did last year, with yields up from 153.9 bushels an acre to 164.7.

In other words, from the perspective of the grain buyer, everything's gone great this year.

But corn farmers remain in a bit of a pickle. You may recall that lovely 2007-2008 commodities run, when it seemed like everything was going up. Between a supposed biofuel boom and a couple of low-yield years, it seemed like corn prices had significant lasting support. Of course, that support disintegrated, and anyone who bought the 2008 top and sold the bottom—which is pretty much right now—has already lost half their investment.

On the plus side, however, China seems to be having a bad year on the corn front. The country has reportedly bought 1 million tons of corn for import; at $291/ton, domestic prices in China are their highest in two years. Keep in mind that overall, corn is not all that expensive per ton, so the localized prices around the world can be quite different. This is quite different than what we see in oil, where the spreads between oil in the North Sea, Texas and Asia can be fairly tight and predictable.

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