Living in Nebraska, it is hard to not be a Nebraska Cornhuskers college football fan. Around this time of year, everyone starts getting very excited about the upcoming season, which happens to kick off Saturday! Recently, when I think about the Cornhuskers, I tend to focus specifically on the corn portion and my mind wanders away from football and into the investment realm.
Corn, as an agricultural product, is a major crop of the Midwest. It makes a tasty snack, but its uses go far beyond that. Corn can be broken down chemically to produce sugar, which can be found in many processed foods and labeled on top of the ingredient list as High Fructose Corn Syrup. This sugar can also be made into a form of alcohol called Ethanol that can be used to power engines (making it a competitor of oil). But no part of the corn is wasted, and after the sugar is extracted, the remains are processed into feed for cattle and hogs (providing a direct correlation between corn and cattle prices).
Corn prices had an upward spike around the middle of June last year after the worst drought in 50 years had destroyed much of the crop. The price has since been slowly trending downward into undervalued territory as rainy weather and a healthy harvest had been forecasted for the 2013 summer. But guess what? There was too much rain! The U.S. Department of Agriculture stated that farmers were unable to plant due to wet weather in May and June, which caused growers to file insurance claims on 3.41 million acres, compared to 262,467 acres last year, reports Tony C. Dreibus for Bloomberg. And of course, due to the incredibly unpredictable Midwest weather, over the past two weeks, Iowa and Illinois, the largest growers of corn, saw little or no rainfall. As the corn supply decreases, the price of corn should go up, as well as the price of corn-fed dependent livestock. But corn is not the only crop feeling the pain, soybean and cotton planting has also been well behind forecasts.
Unfortunately, the U.S. is not the only place hurt by weather. China, after having nine record grain harvests in a row, is having complications. Drought conditions in the south and central parts of China are hurting rice production. Meanwhile, rains in the north and northeast are creating floods that are destroying corn and wheat fields.
Between the agricultural shortages in the U.S. and China, there may be a floor setting in under international grain prices. We see this as an opportune time to take advantage of the situation and have been buying the PowerShares DB Agriculture Fund (DBA), which invests in futures contracts of commodities such as corn, cattle, soybeans, and wheat. Go CORN! And Go Big Red!