Last time we looked at the agriculture sector, the nation’s heartland was suffering through one of the worst droughts in history. Heck, analysts were even predicting that the lack of rain would persist through the rest of this year’s planting season.
As such, production of corn, wheat and soybeans was expected to be significantly lower than expected … which would mean rising prices. Corn futures reached a record $8.49 per bushel in September.
Now, it seems that Mother Nature has made fools of us all.
While the drought-like conditions have lingered in some areas, the recent record snowfalls and rains have provided some relief. And should weather conditions to improve, the harvest should yield a staggering 14.53 billion bushels — a 35% jump over last year’s numbers.
Additionally, the record-high price for the grain has prompted many farmers to begin planting the most corn in nearly eight decades. Analysts estimate that those higher prices will prompt farms to plant 97.73 million acres from March to June, which is an incrase from the 75-year high of 97.16 in 2012. Corn acreage in the U.S. — which happens to be the world’s top producer and exporter — will be the largest since 1936.
According to the USDA, the increased acreage plus a return to normal spring weather conditions will help boost stockpiles before the 2014 harvest to 1.795 billion bushels. If that prediction comes true, that will be the biggest stockpile since 2006 and up from a 17-year low of 632 million this year.
Those factors have conspired against futures pricing and sent investors running from corn futures. Futures contracts for corn — as well as soybeans and wheat — hit record highs last summer as the worst drought since the 1930s scorched the Plains. However, since reaching those records in September, corn has fallen about 7%. Overall, the USDA estimates that corn prices are forecast to average just $4.80 per bushel — down about third from the 2012’s average.
Still, while the short-term picture is predicting a record corn crop, the longer-term one is filled with increasing demand and higher prices. So for investors, the outlook for corn is still rosy … and the drop could be a perfect buying opportunity.
See, the market may not be factoring the continuing effect of the drought. The National Oceanic and Atmospheric Administration (NOAA) released an outlook for persistent drought-like conditions through the end of May in the southern and central Plains. Fourth-largest corn grower Nebraska is covered in severe drought conditions, while more than half of Iowa — the nation’s biggest producer — is experiencing dry soil.
Adding it all up, roughly 83% of the six-state corn-growing region has soil moisture below 10% of normal. These dry soil conditions across the western Midwest and other key producing regions will limit the rebound in corn output.
Back in 2010, the USDA predicted record crops, only to revise them lower as fields were damaged by heavy rains during planting and a heatwave later on. The USDA made the same prediction and revisions the following two years because of droughts. With that in mind, it could be too early to even be thinking about sub-$5 a bushel corn prices.
In fact, most investment bank analysts predict that will we see corn trading at between $6 and $6.80 a bushel by December. That’s a 23% increase versus what December futures are currently trading for.
So while I was a little early with my original buy recommendation based on the continuing drought — as corn futures have since slipped — now could actually be a good buying point for investors. It really does seem like the market isn’t pricing any effects of the continued poor weather conditions and investors could be picking up some values in the grain sector.
Tracking a basket of three futures contracts for corn — specifically the second-to-expire, third-to-expire and the contract expiring in the December — the Teucrium Corn ETF (NYSE:CORN) is the easiest and only pure way to go. The fund should provide investors with a way play rebounding corn prices when the market realizes that the drought is still a major sticking point.
For a broader take, the iPath DJ-UBS Grains ETN (NYSE:JJG) provides exposure to not only corn, but also wheat and soybeans. With the lack of rain and low soil moisture levels affecting growing regions for these commodities as well, playing the trio could make more sense as a drought play than just focusing on corn.
All in all, the market may not be factoring in all the puzzle pieces when it comes to futures pricing in the grains sector. For investors, that could spell opportunity.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.