The corn chart looks eager for a short-term bounce, but the
longer trend looks bearish as U.S. farmers dedicate more acreage
to the crop than ever, creating a glut that neither ethanol
production nor an Argentine drought can overcome.
Last week's crop report
confirmed
what commodity traders have been
saying for weeks
: there is going to be too much corn come harvest time to support
current prices, no matter how much
Chinese demand
ends up taking off the market.
Argentina is still
suffering from significant drought conditions
, but the USDA estimates that the weather there will end up
trimming only 500,000 tons of corn
from the second-largest exporter's harvest this year.
As a result, corn prices have sunk 21% over the last 12
months, taking the Teucrium ETF (
CORN
,
quote
) with them and acting as a drag on broader-based agricultural
ETFs like
DBA
(
quote
).
The corn bulls point to China as a buyer of last resort, but
while it can be fun to think about the world's second-biggest
economy having a theoretically bottomless appetite for raw
materials, the truth is very different.
China has become a net buyer of corn in recent years, but
especially where corn is concerned, it is still almost entirely
self-sufficient, buying a net 6 million tons a year. And with
four times as many people as the United States, China still uses
only 70% as much corn as we do.
Meanwhile, less corn is being diverted to ethanol production.
The USDA says the rate at which food is being turned into fuel
has declined significantly in the last six months while existing
ethanol stocks remain at two-year highs.
In all, ethanol is expected to pull "only" 4.95 billion
bushels of corn off the global market this year, freeing up 1.35
million tons of grain for food purposes -- and more than covering
for Argentina's shortfall in the process.
The USDA is guiding traders to expect $5 a bushel by the end
of the year, down another 19% from present. That bodes badly for
CORN, naturally, but even so, the ETF looks deeply oversold here
and could be ready for a 4% to 5% bounce.
In the longer term, a corn glut would be a huge bonus for
poorer grain importers in the Middle East and North Africa, which
have come to depend on relatively cheap supplies to
feed their increasingly volatile populations
. Food inflation was a major factor in the uprisings of last
year, so any relief here would give the bruised economies -- and
political systems -- of countries like Egypt (
EGPT
,
quote
) time to heal.
Without ethanol as an outlet, a big corn surplus will also be
diverted into long-life foods and other industrial applications.
Think corn syrup, which means you should be looking at Corn
Products International (
CPO
,
quote
) to benefit from lower input costs and possibly higher margins
as well.
