Stressful growing conditions in the U.S. and high demand has pushed corn futures up by more than 30 per cent.Stock photo | Thinkstock
Move over, yellow metal; say hello to the yellow grain. Commodities have been on a tear in the past couple of weeks, but nothing is shining as brightly as corn right now.
Corn futures have surged more than 30 per cent since the middle of June, far outpacing the 10 per cent gain in the broad Reuters/Jefferies CRB index of 19 commodities – not to mention specific stuff like gold and crude oil.
The gains have less to do with the sudden realization that corn is delicious with butter and a sprinkling of sea salt and more to do with terrible growing conditions in the United States, which is threatening this year's harvest.
According to Bloomberg News, corn is entering a critical growth stage at the same time that a dry U.S. heat wave is hurting crop conditions.
A report this week from the U.S. Department of Agriculture said that just 48 per cent of corn crops are now rated as good or excellent, down sharply from 72 per cent at the start of June.
The poor growing conditions are also affecting soybean and wheat crops.
Meanwhile, global demand for corn is growing to record highs as inventories – as a percentage of consumption – is at multi-decade lows, creating a very tight market.
Corn might not excite retail investors the way gold and oil do, given that it is not usually associated with equity-like investments. However, there are investments tied to corn, and they too have been on a tear in recent weeks.
The Teucrium Corn Fund, which has just $68-million (U.S.) in total net assets, follows three corn futures contracts. It has risen 26 per cent since mid-June.
The iPath Dow Jones-UBS Grains total return subindex exchange traded note – which give derivatives-based exposure to grains – has risen 23 per cent over the same period. And Potash Corp. of Saskatchewan Inc., which produces fertilizer, has risen about 20 per cent.
The question is, do you chase these returns? Goldman Sachs Group Inc. said in a report that the terrible growing conditions are going to have a bigger impact on U.S. corn crop yields than the Agriculture Department is currently forecasting, implying that there might be more bad news to come.
And while corn-related investments have been on a tear in recent weeks, the three mentioned above are not at record highs yet, suggesting that there is still some room for them to grow as more investors pile on.
But you have to be careful: Just as corn-related investments sprout on supply concerns, they can wilt just as fast. The Corn Fund, for example, moved above $50 a unit last August, doubling in price in about a year – only to slide about 30 per cent by this June.
David Berman