Latin drought spreads to Brazil and plays havoc with corn prices

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Farmers in Brazil have overcome many obstacles in the past but rainfall has not been one of them until the drought that began in Argentina spread, severely damaging both corn and soy bean crops. With no rain for the entire month of December and only one rainy day in January, farms are hard-pressed to remember a worse season.

Not unlike their U.S. counterparts, Brazilian farmers purchased crop insurance -- but the similarities end there.

Farms are finding the insurance is not worth the premium. The policies cost about 20% expected production cost and only pay out about 70% of production cost.

And as with U.S. car and homeowners insurance, if policyholders file a claim, it will only increase your future premium. As a result, many Brazilian farmers are avoiding filing claims until they completely lose their crops.

Analysts suggest the government is likely to step in to assist with the disaster. Otherwise, Brazil runs the risk of losing 10% of its agricultural output this year and the county's farmers go out of business.

Brazil uses corn not just for food but also for fuel and if farms do not plant a second corn crop before March 10, they run the risk of the crop not maturing before freezing Southern Hemisphere winter weather moves in.

Here too, with farms losing profits and corn already looking relatively expensive, the prospect is that the next crop will be anything but corn -- and likely cheaper to harvest.

With drought a problem in Brazil and Argentina , have we just begun to see corn prices rise as the country may now have to import vs exporting?

Traders can plant their decision via the ETF for corn: Teucrium Corn Fund ( CORN , quote ), which seeks to replicate -- net of expenses -- the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for corn that are traded on the CBOT.

The biggest contracts in the portfolio are the December and second-to-expire CBOT corn futures contracts, each weighted 35%. The third-to-expire CBOT corn futures contract is weighted 30%.

CORN will invest in corn futures contracts. It may also invest in corn-based swap agreements, short-term obligations of the U.S. government and/or cash equivalents.

 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International , Stocks

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