With corn prices skyrocketing in disastrous drought
conditions, investors have been piling into the most obvious way
to invest in corn: the Teucrium Corn Fund (
CORN
).
CORN
data by
YCharts
That's impressive, sure. And while corn hogs the attention,
some other grain-focused ETFs have done even better:
CORN
data by
YCharts
But long-term investors here are likely to trip. Besides the
fact that grain prices presumably won't go straight up forever,
commodity exchange-traded products have complicating factors like
contango, which
Bloomberg
described best in its 2010 expose.
Contango in short: When the front-month futures contract
expires and investors roll over their position to the next
contract, there's cost involved, particularly when the next
contract costs more than the front-month. If you followed and
understood that, go ahead and trade your corn fund with
gusto.
But if you didn't, the point is that this stuff gets
complicated fast - and you might be better off sticking with
stocks. Agriculture stocks are an imperfect proxy for commodities
as they're of course affected by all sorts of other factors
besides weather, supply and demand. But if you buy into the
argument that a growing population requires more of our current
cuisines, stocks may be a better long-term play. Here are some to
consider.
Machinery:
When it's time for any non-withered corn to be harvested,
farmers will get out their modern combines, which are a far cry
from the original farm plows. Farms are getting bigger, and
farmers are buying bigger equipment. The Association of Equipment
Manufacturers says farm tractor retail sales climbed 5.4% in
June, and those with 100 horsepower or more rose 24.5%.
In this, the biggest player in is John Deere (
DE
), joined by CNH Global (
CNH
) and Agco (
AGCO
).
DE
data by
YCharts
As Bloomberg Businessweek recently described, farmers with
thousands of acres to work are willing to spend more to get
Deere's fancy but brutal equipment. That has helped it pay a
healthy dividend, and the
dividend yield
could be expected to grow for those who buy now because Deere is
a company that increases its dividend over time.
DE Dividend
data by
YCharts
The drought could mean fewer farmers buying tractors and other
machines next year. That's a suggestion Deere disputed when
announcing quarterly results, but it could also push down these
stocks to attractive levels for long-term holders.
Processors:
Even when the weather smiles on farmers, their miles upon
miles of corn are barely edible and need to processed into
high-fructose corn syrup, ethanol, and cattle feed. The top
agriculture processors are known as ABCD: Archer Daniels Midland
(
ADM
), Bunge (
BG
), Cargill and Louis Dreyfus.
ADM
data by
YCharts
Processors have been under pressure, some of it
self-inflicted. In ADM's case, a big bet on ethanol has put it in
a bind. As
YCharts
recently explained, it's paying more for corn and making less
from ethanol. At Bunge, the world's top oilseed processor, lots
of soybeans have made for thin margins. But they may be deals:
YCharts Pro service rates both as attractive.
Seeds and Fertilizer:
No matter how terrible the situation is for farmers this year,
odds have it there will still be farmers around to put seeds in
the ground next spring. For that, many will turn to Monsanto (
MON
), DuPont (
DD
) and Syngenta (
SYT
).
MON
data by
YCharts
Monsanto's been working on genetically modified
drought-tolerant seeds. While a scientific group has gone on
record as skeptical those seeds really work, expect next year's
farmers to be willing to try almost anything to avoid seeing
their crops die from drought, again.
As for fertilizer:
AGU
data by
YCharts
They'll still need that next year, too. And this year --
anyone who still has corn growing wants to get as many kernels as
possible.
Emily Lambert is an editor for the
YCharts Pro Investor Service
which includes professional
stock charts
,
stock ratings
and
portfolio strategies
.