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Barron's is wrong, the price of corn is going up (alternate title: the Government's Nuts)

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March 31, 2008 – Comments (7) | RELATED TICKERS: DE , CNH , SYT

I just had an opportunity to take a look at this morning's USDA Planting Intentions Report. 

http://www.nytimes.com/2008/03/31/business/01crop-web.html 

The report showed that farmers are planning on planting 86 million acres of corn in the United States this year, 8% less than they planted last year.  Another interesting number that the report contained is the quarterly grain stock estimate which showed that as of March 1st the U.S. inventory of corn was 217 million bushels lower than analysts were estimating it would be.  There is a good chance that this shortfall was caused by the fact that the USDA overestimated the size of last year's corn crop.  Whatever the reason, the reduction in corn planting and the low stock level is causing the price of corn to skyrocket.  Ordinarily, an increase in the price of corn would convince some farmers to plant more, which would eventually help lower the price.  However, the Midwest has been experiencing extremely wet weather lately which has prevented some farmers from getting their corn in the ground.  Soybeans can be planted several weeks later than corn can.  As a result, continued wet weather may further increase the price of corn as farmers who originally stated that they were planning on planting it switch to a crop that they can plant later.  Not only that, but if we end up having a dry summer, or if there is even a hint that there might be a drought in the weather forecasts the price of corn will explode.

Add to this the fact that after some positive developments early this weekend, the farmer's strike in Argentina is going as strong as ever,

http://seekingalpha.com/article/70466-argentine-agro-strike-resumes-in-full-throttle?source=yahoo

And the price of corn is going to continue to rise.  So what you say, blah, blah, blah corn this, and corn that.  Who cares?  I don't invest directly in commodities and I'll just eat less corn on the cob this summer.  Well, an increase in the price of corn will have a dramatic impact upon many stocks and the price of the food that you buy for your family at the grocery store.  For example, ethanol producers are doomed as the price of producing ethanol from corn will continue to rise.  Restaurants will likely feel even more pressure, as the prices of their ingredients continue to rise and consumers begin to feel the pinch of higher food prices at home and cut back by eating out less.  If the price of meat, bread, etc... gets too high consumers are going to really start to feel the pain.  Higher food prices may cause consumers to cut back on buying "fun" things like electronics, vacations, $10 cups of coffee at Starbucks...  Consumer spending makes up two-thirds of the U.S. GDP.  As the consumer goes, so goes the U.S. economy.  The absurd government ethanol boondoggle is going to end up hurting everyone. 

In addition to destroying the economy, you know what else the governments' absurd ethanol policy is destroying?  The rain forests.  I'm far from a tree-hugger, but the following article is enough to make you sick:

http://www.time.com/time/magazine/article/0,9171,1725975,00.html

I've about had it with the current administration, between an unnecessary war that has wasted trillions of tax dollars (not to mention thousands of innocent lives) and hurt the U.S. dollar by running up a massive federal deficit, they are destroying the economy with their absurd energy policies.  As the bumper sticker goes, "If you're not mad, then you aren't paying attention."  And this is coming from a registered Republican.

To say something positive and constructive, let's talk about who the high price of corn will benefit, besides farmers.  I see the companies that cater to farmers as the main beneficiaries.  Namely, anyone who sells farm equipment, seeds, etc... like John Deere (DE), CNH Global (CNH), Monsanto (MON), Dow Chemical (DOW), and Syngenta (SYT) as well as the fertilizer producers (but they seem a little expensive to my taste for the most part).

Clarence Beeks er, uh I meen Deej

Long DE, CNH, DOW, and SYT

P.S. Anyone know that my fake name was in reference to?

7 Comments – Post Your Own

#1) On March 31, 2008 at 5:11 PM, ATWDLimited (< 20) wrote:

Trading Places, 1983.

I see corn and food prices surging as well, along with the federal debt and the collapse of the dollar. Not good at all. Why not use our cola, drill our oil, make real alternatives like hydrogen and stop wasting time with more polluting, inefficient ethanol and let prices go down about. No we have to pander and do idiotic things instead of what makes sense.

Come visit the The Official Dollar Report, for important information regarding the fundamental weakness of the dollar.

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#2) On March 31, 2008 at 5:44 PM, Garranova (87.40) wrote:

"In this country we say Happy New Year"

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#3) On March 31, 2008 at 6:03 PM, devoish (97.62) wrote:

I read recently that 90% of the food we eat is based on 4 crops. rice, wheat, soy and corn. From our cereals to our matzos and just about everything prepared. regardless I am long UNFI (not in RL) because none of that mess affects organic food. No chemical fertilizers, no pesticides, and certainly no organic corn ethanol!  Transportation costs will go up, but thats all. Nope, I have to actually thank the Bush knuckleheads for closing the gap between the price of organics and conventional foods. Silly me though, I had hoped the cost of organics would come down toward conventional prices, instead of raising the cost of cra/p.. I mean the stuff you eat.

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#4) On March 31, 2008 at 6:25 PM, Hezakiah (93.54) wrote:

Good post... How long it has been since the last time retail investors were digging through crop planting reports?

I have been wondering why livestock prices are severely lagging the rally in soft commodities.  See COW, which tracks U.S. beef and pork.

http://www.ipathetn.com/iPath-Dow-Jones-AIG-Livestock-Total-Return-Subindex-ETN-overview.jsp 

This chart is quite telling: http://finance.yahoo.com/q/bc?t=6m&s=COW&l=on&z=m&q=l&c=dba 

 

Any insight here?

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#5) On March 31, 2008 at 8:52 PM, TMFDeej (99.27) wrote:

Thanks Hezakiah.  I am not familiar with "COW" but I am fairly confident that the price of beef and pork are going to increase.  I'll have to look into it, at least for my CAPS portfolio.

In other news, I beat the AP to the punch.  They came out with this article at least four hours after I published mine:

"Less Corn Could Mean Higher Food Prices"

http://biz.yahoo.com/ap/080331/planting_report.html

Deej 

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#6) On April 01, 2008 at 8:05 AM, abitare (94.81) wrote:

Good post. Ignoring Barons is tougher, then ignoring Time magazine or Newsweek etc.... Barons makes some good calls.

I closed my COW
outperform. Cows and pigs eat lots and lots of Expensive CORN, and other expensive commodities. There is very little pricing power in live hogs and cows. Plus expensive gas hurts these farmers also. 

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#7) On April 01, 2008 at 10:07 AM, TMFDeej (99.27) wrote:

Well, commodities markets seem to be pulling back a little this morning.  As I said earlier, speculation may have help fuel the rally in grains and caused them to get ahead of themselves a little, but the underlying cause for the sharp price increase in grain and soybeans the past six months is our government’s policy on ethanol.  There are currently 62 million acres or 20% of our nation’s crop acres diverted away from food and feed production to the production of fuel ethanol and the Conservation Reserve Program.  There is more demand for than supply of these commodities right now.  The long-term bull run in the prices of them will be fueled by demand and supply dynamics, regardless of short term movements in price.

 

Deej

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