21 days Later
21 days ago I penned the post "Beware of Popcorn"
On February 4th, I wrote a post titled "Don't Cows and Chickens Have to Eat?" which basically said that the corn futures were in a speculative bubble, being pumped for profit by people who had invested 6 months earlier.
At that time farmers were being paid a Jan. spot price of $5.37 for a bushel of corn, March and July bushels were $6.48, while Oct was $5.35.
A week late July futures had been pumped to $6.85, and a week after that Feb 18th, they reached the $7.00 mark. The etf CORN rose from $41.00 to $43.00.
Today a July bushel of corn is worth $6.34 and Oct is $5.15. And farmers do make money at $5.15.
Interestingly, just after investment/trading websites were suddenly tipping all of us off on the CORN opportunity, trading volume in the etf CORN doubled as people looking to turn a quick buck jumped in on the advice. The price did not double though.
Right now the end users of corn - kellogs and coca cola and the ethanol companys for instance - are contracting to buy the corn they will use in October for $5.15/ bushel. Unless there is a weather event that wipes out acres of corn and the farmer cannot deliver $5.15 corn to Kellogs, that is about where the price will stay.
So for those of you that bought a CORN etf, that "invested" in a bushel of July corn for $7.00, You can pray for bad weather and a jump in corn prices, or take a loss, or take delivery.
Beware of Popcorn
As it turns out I wrote that post at the low of $5.15 before futures prices turned back north. So here it is 21 days later. The USDA just issued a report saying that farmers are saying they are getting paid between $5.15 and $5.65 per bushel of corn. Futures contracts out until July are at $7.20, August is $6.60 and beyond that is just under $6.00.
After averaging just around and then under 100,000 shares/day traded of the ETF CORN since a one day spike on Feb 18th, on March 31st and April 1st almost 300,000 shares traded on each day, spiking the share price from $40.00 up to $45.00.
Now once again, I am pretty sure that nobody buying shares of an etf for $45.00 actually expects to take delivery of the seven bushels of corn that $45.00 represents.
Now as I understand a market, there is a consumer, say Kellogs corn flakes, and a seller, who is the grower. And in the case of corn there is a grain storage depot, a middleman, helping to connect buyers and sellers. The ethanol company Green Plains is one. So what role does an ETF play? It is neither a consumer or a grower. Is it merely an opportunity for investors to insert themselves into a market in which they add no value? And between CORN, and JJG and JJA and RJA and others, are their enough rent seekers to significantly affect prices to food processors and our food prices?
US farmers are planting more corn this year than last year. Mexico crops got hurt but otherwise winter corn was good. There is enough corn out there to supply ethanol and food and cattle. But there is not enough to supply the financial speculation going on, and at some point the etf CORN will have to store the corn it has contracted to buy, or sell the contracts.
I'm not cheering for a bad growing year to favor the speculators on this one. I would rather see them have to sell their contracts into a well supplied market.Higher Food Prices Can Spur Increased Production
This is a seven-page Hightower Report that argues in favor of higher prices for food that result from speculation during times of crisis.Allowing speculation on food prices is good, as higher prices create incentives for more production. Food price increases are also related to increased demand from emerging economies, especially in China and in India. Higher prices lead to decreased consumption, which can lead to lower prices. More production will eventually lead to lower prices Imposing price controls or stifling speculation is counter-productive in terms of increasing food production.
The report expresses the belief that:
It was written in the context of the political unrest taking place in the Middle East in early 2011, and the related increase in raw commodity prices as the markets became unsettled by the discord.
"Higher prices lead to to decreased consumption which can lead to lower prices"
Decreased consumption means starvation to those with the fewest dollars. So their starvation is the price paid to investors - us - as we enrich ourselves at their expense.
And I'm not good with that. Government subsidys paid to farmers is a better way of spurring investment and increasing food production.
Subsidys paid to growers of foods other than corn would be even better. And no borrowing, just taxes.