Watching Spiking Corn Prices

Posted on July 16th, 2012

Corn has been spiking on Midwest drought fears. A look at the CORN, the ETF from Tuecrium, has jumped from $35 a share on June 18th to touching $50 today. Longer term, we have a bias that this “lack of supply” driven run will subside as markets, both US and foreign, will eventually meet the demand. Let face it, farmers are going to be financially incented to plant more corn while prices are up.
Companies that have costs tied to the price of corn are going to feel pain on the bottom line in the form of both the product itself and the cost of feed for livestock.

But this pressure has yet to show itself universally across the Food and Beverage sector stocks. Kellogg (K) and ConAgra (CAG) are trading right around their 6/18 prices and General Mils (GIS), for example is actually trading higher than before all this drought talk.
What is the reason for this? Right now, the market expects these huge food companies have properly hedged and locked in prices much lower than the current corn market is pricing. However, as the weather continues to provide no end in sight to the drought, reserves may end up getting sold into the supply chain. And why wouldn’t they? Corn at these levels is almost what anyone with reserves is waiting for.

The domino effect is that next year, when the hedges are done, these large food providers will have to hedge at a higher price than they are in for now. Those prices should be lower than the price today, but higher than the prices of say 4 months ago, so expect the costs to go up for these companies.

On the flip side, consider the companies that benefit from higher corn prices. Seed and fertilizer companies like Monsanto (MON), Potash (PT), or Mosaic (MOS) should all benefit. The charts show that they’ve started to already as each is up from their 6/18 prices by about 10%.
There are also the equipment makers like John Deere Co (DE) or Caterpillar (CAT) that have yet to see their pop from this yet.  Most of the pressure on these companies is coming from an international sales lag, but you could consider the corn price spike as a driver of new business domestically.

Bottom line, here’s where we stand on all this:
• Corn should be lower by the fall due to new supply coming in to the current market
• Food providers are probably overvalued here considering pending cost increases
• Seed and Fertilizer companies are already showing signs of price appreciation
• Equipment providers have yet to reflect the domestic demand as international challenges are trumping growth outlooks.

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