Conclusion: U.S. dollar weakness, long term demand, and softer yields than expected keep us bullish on corn.
Positions: Long Corn via the etf CORN
Earlier today we sold our agriculture position via the etf DBA for a small profit, but we remain long corn, via the etf CORN. In the attached chart we highlighted one key reason to be long corn, which is U.S. dollar weakness. The threat, risk, and overhang of loose monetary policy and continued monetary easing will serve to continue to weaken the U.S. dollar and inflate commodities that are priced in dollars, such as corn.
While the recent corn stocks report from the USDA came in about 300 million bushels higher than expected, the view many of our commodity contacts is that this report is likely not accurate. Even though we find it difficult to believe that government data may not be accurate (this is sarcasm), those closest to the date seem to believe the stock number is not aligned with the reality of the stock situation. In fact, there is a view that the vast majority of this “surprise” 300 million bushels is actually old crop corn that is often traded at a 80% discount to the market.
Next Friday, the USDA will release more data on corn situation, specifically the yield estimate. Interestingly, the USDA estimated national yield in August at a record. As one subscriber wrote us:
“In the 2010 August crop report the USDA estimated the national yield at a record. Given the extraordinary weather we have had this summer, I found that quite amazing. We had an unprecedented amount of rainfall in key growing areas in June, July and August. Some areas in Iowa received over 50 inches in these months. Nighttime temperatures were at an all time record for several weeks after pollination. Top agronomists have written many papers on the negative effects of high nighttime temperatures on kernel fill, or ear weight, and yet in their September report the USDA used a near record ear weight.”
Needless to say, the yield data seems set up to disappoint and is likely to decline sequentially.
Just as a broader frame of reference, corn is more than just a speculative commodity the lads at Hedgeye like to trade. In fact, corn is the most widely produced feed grain in the United States, accounting for more than 90% of total value and production of feed grains. Almost 80 million acres of corn are planted in the United States and corn is the main ingredient in livestock feed, so will impact the margin and prices on cattle and pigs as well. Corn is also a major export product as more than 20% of corn grown in the U.S. is exported. Corn is almost an important input in ethanol, whose demand is only expected to grow in coming years based on the Energy Independence and Security Act of 2007 which mandates increased use of biofuels.
Given the importance of corn to the U.S. economy, it makes us wonder why the USDA’s data is so corny.
Daryl G. Jones