Floodwaters Could Bail Out My Corn Call

by Aaron Levitt | April 25, 2013 11:09 am

Rain. It’s the one thing farmers across the parched Midwest wanted.

If you remember[1], last year’s record heat and the summer’s extreme dryness caused more than two-thirds of the Lower 48 to experience severe drought conditions. That lack of rain managed to cut corn production by 27% from early-season estimates; soybean prices surged; wheat prices jumped to a four-year high; and farmers collected a record $11.6 billion on insurance claims for damage to all crops in 2012.

Those drought-like conditions persisted into the New Year and made for some interesting conditions in the ag futures markets[2].

Well, it seems like the farmers are finally getting that much-needed rainfall. And then some.

Melting snowpack plus severe storms across the northern Midwest last week spurred flooding along rivers as far south as Tennessee. That flooding is causing huge headaches for farmers needing to get seed into the ground.

For investors, it could lead to opportunities and some redemption.

Huge Rainfalls

As the old adage says, “When it rains, it pours.” In this case it’s about 6 inches of precipitation in about two days. Storms over the past week across America’s Heartland have dumped gallons of water on the parched plains, only to oversaturate the dry land. That’s causing some major issues on the flooding front.

The surge of rushing water[3] is quickly making its way down the Mississippi and Illinois rivers through their tributaries. According to meteorologists at AccuWeather, more than 150 areas were considered to be in the “flood stage” across the United States. This included 37 at “major” flood stages — almost all of them in the upper Midwest. The weather service designates regions as major when there will be “extensive inundation of structures and roads, and that significant evacuations are likely.”

The excessive rainfall and snow can only be seen a major slap in the face to region that has suffered from one of the worst droughts since the Dust Bowl. However, things continue to get worse. Some areas of the Corn Belt are scheduled to receive as much as 8 inches of snow this week as colder temperatures and wet weather persist[4].

All of this isn’t making for a good time for the ag sector[5].

While farmers had planned on planting one of the largest corn crops in decades — hoping to take advantage of high prices — that plan isn’t going so well. The excessive rain and flooding have pushed back plantings. Data from the U.S. Department of Agriculture shows that corn plantings in the largest U.S. producing states was only 2% complete as of April 14. That’s well behind last year’s pace of 16% at that time. And the USDA predicts that the floods will significantly reduce the overall available land for planting[6] for this growing season.

Then there’s the issue with transporting[7] those harvests.

About 60% of U.S. grain exports are moved via barges along the Mississippi River — making their way from growing regions in the Midwest to export terminals[8] along the Gulf of Mexico. As such, the recent flooding is putting a crimp in that system. Various locks along the river have been closed due to high water levels and flooding. Another portion of the flooded Mississippi River was closed by the Coast Guard after 30 barges carrying grain broke free of their moorings[9] and drifted away or ran aground.

A Redemption Chance for My Mea Culpa

Despite the wonky weather, corn and wheat futures have plummeted since my recommendation to buy[10] back in February as investors digested the predicted record crop plantings. My argument then was that the market wasn’t fully taking into account the potential for additional severe weather throughout this summer.

Well, here’s that crazy weather that no figured would happen … even though the past three summers have been met with some kind of weather disturbance.

Given that plantings are now way behind schedule and with more rain on the way, investors looking to higher corn prices may finally get their wish. Already, spot prices[11] for barge shipments for corn at Gulf of Mexico export terminals surged by more than 10 cents a bushel to hit a one-month peak. Eventually, those price increases will start to trickle down the line.

Depending on bad the fallout of the flood is and just how “smaller” the corn crop ends up being, we could see a repeat of last summer’s record highs.

For investors, that makes the Teucrium Corn ETF (NYSE:CORN[12]) a potential buy. Tracking a basket of three futures contracts for corn — specifically the second-to-expire, third-to-expire and the contract expiring in the December — is the easiest and only pure way to go to play the flood’s fallout. While it hasn’t been a good performer this year so far, investors could finally see some hefty gains as the ag sector moves from drought to excess rain.

I may have been early with my recommendation, but investors may still win out in the end.

At the time of publication, Levitt had no positions in the securities mentioned. 

Endnotes:
  1. If you remember: http://investorplace.com/2013/01/another-drought-ahead-prepare-now/
  2. ag futures markets: http://investorplace.com/2013/04/commodities-for-stock-investors-april/
  3. rushing water: http://investorplace.com/2013/03/3-water-utilities-that-could-make-a-big-splash/
  4. colder temperatures and wet weather persist: http://investorplace.com/2013/04/great-plains-cold-snaps-hits-wheat-crop/
  5. ag sector: http://investorplace.com/2013/04/jump-into-the-timber-super-cycle/
  6. the floods will significantly reduce the overall available land for planting: http://www.bloomberg.com/news/2013-04-22/u-s-midwest-floods-delay-corn-sowing-after-drought-curbed-crop.html
  7. transporting: http://investorplace.com/2013/03/2-ways-to-play-resurgent-transports/
  8. export terminals: http://investorplace.com/2013/04/aussie-aussie-aussie-l-n-g/
  9. 30 barges carrying grain broke free of their moorings: http://www.reuters.com/article/2013/04/19/usa-rivers-locks-idUSL2N0D61F820130419
  10. my recommendation to buy: http://investorplace.com/2013/02/record-corn-crop-its-still-buying-season/
  11. spot prices: http://investorplace.com/hot-topics/agriculture-stocks/
  12. CORN: http://studio-5.financialcontent.com/investplace/quote?Symbol=CORN

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