Thursday, April 3, 2008

Corn Jumps to $6 - Start Stocking up on Soda Pop

Monday we had the USDA Crop Report [Mar 31: USDA Crop Report]

Corn plantings indicated down 8%. Even before that report my prediction was:

With that said, no change to my long term view and I look forward to next week's crop report - my expectation is the exact reverse of what happened last year when farmers piled into corn due to the ethanol boondoggle. With the ridiculous rise in wheat, I expect a huge upswing in wheat plantings and ... *drumroll* a shortage in corn. Which will drive it up next fall/winter ;) And so the World of Shortages continues

And so it's already happening. What people miss in the wheat vs soybean v corn vs whatever debate is, we don't have enough acres period. Yields are too low despite all of Monsanto's (MON) best efforts. Corn's high prices 2 years ago led to a massive overplanting of corn, drawing down from wheat/soybeans/others. Wheat/soybean prices surged this year, because of the ethanol corn initiative. Now as wheat/soybean prices rise spectacularly, farmers turn this year to overplant those 2 - causing a shortage in corn in the coming months/year. Do you see how this is circular? And on top of all that is an ever increasing global demand picture for all things food. And the market is reacting in kind already with corn bumping to $6 just like that. Now my prediction is the USDA report (which is simply an intention to plant, not set in stone) which everyone is freaking over will actually not come to fruition as is.... as farmers see corn immediately increase in price simply to this 1 report, some portion are going to switch acres right back to corn from their earlier plans for soybeans/wheat. If they *can* since some of the prime corn growing area is either underwater or soggy as heck. [Mar 25: This Day in Agriculture]. And that move back to corn is going to cause a shortage in.... well wheat/soybeans. And so we go.

If I had access to a narrow corn ETF I'd of loaded up on that before the crop report came out because this was a very predictable situation. (they trade in London but not here in the US - go figure). But instead we are left with Powershares DB Agriculture Fund (DBA) which cuts both ways - the rise in corn is offset by falls in wheat/soybeans. But that's a short term issue. They are all going up in the long run... because you will know what will happen next year... these record high corn prices will lead to next year's USDA report showing a massive intent of corn planting ... leading to a shortage of.... well you get the picture. The agflation theme is alive and well even if hedge funds have chosen not to speculate this week in the commodities arena.

And on and on we go, the corn ethanol boondoggle helping to accelerate a whirlwind of global food supply havoc... as wheat and corn stockpiles continue to multi decade lows. Praying for no bad weather this year across the globe..... as we await the inevitable global food crisis. "World of Shortages" plays on behind the surface... growing by the day.
  • Corn prices jumped to a record $6 a bushel Thursday, driven up by an expected supply shortfall that will only add to Americans' growing grocery bill and further squeeze struggling ethanol producers.
  • Corn prices have shot up nearly 30 percent this year amid dwindling stockpiles and surging demand for the grain used to feed livestock and make alternative fuels including ethanol. Prices are poised to go even higher after the U.S. government this week predicted that American farmers — the world's biggest corn producers — will plant sharply less of the crop in 2008 compared to last year.
  • "It's a demand-driven market and we may not be planting enough acres to supply demand, so that adds to the bullishness of corn," said Elaine Kub, a grains analyst with DTN in Omaha, Neb.
  • Corn for the most actively traded May contract rose 4.25 cents to settle at $6 a bushel on the Chicago Board of Trade, after earlier rising to $6.025 a bushel — a new all-time high.
  • While corn growers are reaping record profits, U.S. consumers can expect even higher grocery bills — especially for meat and pork — as livestock producers are forced to pass on higher animal feed costs and thin their herd size. (this was another prediction I laid out, these input prices are going to lead to early slaughters and a "meat" shortage down the road, causing a spike in prices there - even more so than already)
  • In addition, corn and corn syrup are used in an array of products, meaning the price of everything from candy to soft drinks will eventually go up, analysts say. It's the latest dose of bad news for U.S. consumers, who are already struggling with higher food costs from record increases in the price of wheat, soybeans and other agriculture products.
  • "For years, corn was cheap and fermentation processes for ethanol production came to completely dominate the biofuel industry in North America," Michael Jackson, president and chairman of Vancouver-based ethanol maker Syntec Biofuel, said this week. "Now, with corn prices well over $5 a bushel, corn ethanol economics have gone out the window." (maybe we can bail them out? Or better yet SUBSIDIZE them! Yeh! Free markets and all) Looking ahead, only the strongest ethanol producers will survive in an era of ever-rising corn prices, said Soleil Securities analyst Ian Horowitz.
The ETF I referenced above is rebounding from its hedge fund sell off, and could be poised to move back up...

... remember, every 4th day we have to suffer through "the Commodities trade is over" stigma so it will be volatile. But the fundamentals support a higher move... and if weather does not cooperate this year or something like a fungus that helps to puncture Africa and Asia's wheat crops, it will be much higher... along with leading to potential famines in many parts of the 2nd and 3rd world. So let's continue on our current policy officially code named "Cross Our Fingers" and hope not one thing goes wrong the next 6 months so people don't start dying. But I digress, as Americans we have bigger things to worry about than global famine.... i.e. our soda pop might increase another 20 cents. Tragic.

I really feel like one of those guys warning of the subprime/credit contagion in 2005-2006. Shouting into the wind while the oblivious masses continue onward... oh well - let's hope project "Cross Our Fingers" works out. Things like this [Bloomberg: Pakistan Rice Exports May Drop, Worsening Shortage] are really going to ruin this strategy and we might have to move on to the more drastic "Cross Our Toes" project.

Long Powershares DB Agriculture Fund in fund; no personal position

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