Grain opportunities for the future- Corn


The United States is the world's largest producer and exporter of corn. The U.S. plants the annual corn crop in the spring and harvest occurs in the fall. Therefore, the December corn futures contract traded on the Chicago Board of Trade (CBOT) division of the Chicago Mercantile Exchange (CME) is the "new crop" contract. New crop refers to the crop not yet in the ground or one that is currently growing.

Corn is an unusual commodity; it touches all aspects of our daily lives. Aside from its properties as food, corn is a key ingredient in the U.S. in the fuel that powers our motor vehicles. Ethanol in the U.S. is a product of corn; in fact, each person in the U.S. consumes approximately 16.5 bushels of corn each year in the form of fuel. It is amazing how many everyday products that we encounter contain the grain. Carpeted floors, wallpaper, shades on windows, paint, ceiling tiles and plywood all contain corn. When it comes to our cars, corn is not only in our fuel tanks.

Tanning leather seats require corn and tires include corn. Of course, corn is a major part of our daily diet. Chips and baked snacks often need either corn oil or cornstarch for their production. Ketchup, mustard and hot sauce all contain corn as an ingredient and beverages like soda often get their sweet taste from corn syrup.

Beer and wine use corn in the fermentation process. Paper, ink, adhesives, and glues contain corn. Plastic bottles and containers all contain corn as do the bottle tops and labels that identify contents. Cornstarch holds the compounds necessary to produce an aspirin together.

Corn is also a feedstock used to produce other foods.

It takes approximately ten pounds of corn to produce one pound of beef while it takes around three pounds of corn to make one pound of chicken. Each person in the United States consumes around 43.6 bushels of corn each year -- as a bushel weighs 56 pounds that amounts to 2,441.6 pounds of corn consumption per person each year. The numbers are staggering. With a total U.S. population of 321 million people, that means consumers require almost 14 billion bushels or 784 billion pounds of corn each year. That is in the U.S. alone. The annual production of corn that emanates from the U.S. and around the world varies. As an agricultural commodity, corn is heavily dependent on favorable growing conditions. Therefore, a growing season with too little moisture, or drought, will lower corn crop yields as will a year when there is too much moisture, or floods. For the ideal corn crop, ideal weather conditions are an imperative. In 2012, the corn crop suffered from a destructive drought that swept through the U.S. In response to the dry conditions; corn prices rallied to all-time highs of $8.4375 per bushel. In the two years that followed, ideal weather and growing conditions led to bumper crops, which brought prices lower.

As of June 30, 2015, the price of December corn futures on the CBOT was trading at the $4.315 per bushel level -- 49% below the price just three years before. In 2016, the price of the grain dropped below $3.50 per bushel.

Commodity prices are all cyclical in nature. Bull market cycles often give way to bear market cycles. Many factors including supply and demand fundamentals influence these cycles. When it comes to the agricultural commodities, the weather each year is perhaps the single most significant price determinate. Corn is a highly significant grain commodity to U.S. and global consumers with a myriad of uses. The current price of corn assumes another bountiful crop during the 2015 season. That is a leap of faith since no one but Mother Nature herself knows what the future holds for the corn crop.

Therefore, with prices at the lowest level in many years, the downside regarding price is limited and the upside, as we saw in 2012, is potentially explosive. The current price of corn provides investors with a limited-risk opportunity to profit if this year's corn crop comes in below optimistic expectations. Moreover, corn promises to be an attractive investment opportunity in the years ahead if prices remain at the current depressed level. Demographics point to growing world population and with wealth rising in emerging markets, like China and India, demand for corn is sure to increase in the years ahead. Corn trades on the futures exchange and there are ETF and ETN products that reflect price action in this important grain market.

Recent Developments in Corn

In 2015, U.S. farmers produced another bumper corn crop and in 2016, it looks like corn production will once again exceed global demand. The price of corn rose briefly during late planting season in 2016 reaching highs of almost $4.50 per bushel, but excellent crop progress led the price to fall to below $3.50 as the weather cooperated and markets looked forward to another year of abundant production of the grain.

Another factor that weighed on the price of corn in 2016 was a drop in the price of ethanol. In the United States, a significant portion of the annual corn crop is required for the production of ethanol. A decrease in the ethanol price from $1.70 to under $1.40 per gallon between the late spring and mid-summer of 2016 caused the corn price to drop. Corn is a year-to-year crop and even though there were bumper crops from 2013 through 2015 and there will likely be another massive crop in 2016, there are no guarantees that this will continue in the future.