Corn: Burden to Consumers, But Big Boon For Investors

Corn prices are flying higher, presenting headaches for consumers but opportunities for investors.

Eri Morita | Riser | Getty Images

The grain is an integral part of the food chain, either by itself, through its use in various other products or as a feed to livestock such as chicken and cows.

But over the summer, corn also has become an investment with a powerful return, thanks in part to weak-dollar policiesand strong demand that has outstripped a mediocre period for production.

In fact, some analysts think corn prices could test record price levels of $7.67 a bushel set two years ago when the dollar also was tumbling and investors were looking for anyplace to park their money as the financial crisis raged.

"If we look at the structure of the corn market, the trend is showing investment money coming in and the futures spreads are boosting the commercial outlook," says Darin Newsom, commodities analyst at DTN in Omaha, Neb. "Both sides are growing more bullish. The type of market we have, we could certainly test those price levels that we saw in 2008."

Investors can take advantage of corn movements in a variety of ways, including futures contracts, exchange-traded funds, or companies that will benefit from more corn demand, such as farm equipment manufacturers.

Corn has exploded since reaching a 2010 low on June 28, rising 67 percent since then and 16 percent in October alone. Its trajectory closely follows the decline of the dollar, which began sinking in early June and has dropped off precipitously as expectations have increased for more money-printing by the Federal Reserve.

More aggressive gains would be bad for consumers, who have been getting hit with steady price increases at the supermarket. The Labor Department said Thursday that producer prices rose 0.4 percent in September, primarily due to volatile food and energy costs.

That presents a dilemma for investors over the propriety of capitalizing on assets that, if they gain in price, will hurt needy consumers in the weak economy.

"You're forced to buy these commodities. I don't want to buy them. It's not good for the country, but you have to," Michael Pento, senior economist at Euro Pacific Capital in New York, said in a CNBC interview. "What's the reward for having people sitting on the unemployment line? Paying higher prices for the stuff they eat and put in their car. It's not fair."

The growth of emerging markets around the globe also has helped push demand for the crop higher.

The incentive for investors, then, is two-fold: speculative based on the dollar's future, and fundamental predicated on continued demand. The situation draws comparisons to the moves of oil two years ago, when crude prices hit a record $147 a barrel.

"The 100 percent influence is the dollar, because all the commodities are benchmarked against the US dollar. All we're doing is discounting to foreign buyers the price of corn," says Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. "Speculative or whatever, it's creating more trading."

But Horwitz also notes that corn does have fundamental underpinnings.

The crop was generally considered under-planted this year against the rise in global demand. And the US Environmental Protection Agency handed down a key ruling earlier this week, allowing cars made in 2007 or later to run on gas with 15 percent ethanol as opposed to the earlier requirement of 10 percent.

Though the ruling disappointed the ethanol industry somewhat, it still should be somewhat bullish for corn, which is a key ingredient in ethanol production.

For investors, buying individual contracts for corn and other grains—all of which have been rising—are generally the domain of those with more experience as they can be dangerous due to price volatility and the complexity of futures.

Instead, many are using ETFs such as the Powershares Agriculture Fund , which has a wide distribution of agricultural products, including a 5.91 percent weighting toward corn. Another of the more popular fund is the Market Vectors Agribusiness Fund, which is comprised of multiple companies that benefit from higher grain prices.

The DBA has gained 26 percent since its low on June 28, while MOO has jumped 38 percent since its July 1 low.

As for individual companies, Deere, Caterpillar, Mosaic and Agrium are often mentioned by strategists as corn plays.

"We started buying soft commodities only a few months ago. The reason we started buying is we were trying to find an asset that had not appreciated as much as everything else," says Mike Savage, president of Savage Financial Group in East Stroudsburg, Pa. "The thing that struck me with commodities is the prices were low.

"We had three bumper crops in a row and it was priced in to have another bumper crop. If it didn't we had a chance to make a good, quick buck, which we did, and if it didn't we didn't see much downside."

Savage says his firm mainly uses ETFs for the soft grains and will continue to do so, though he thinks "the big gains might be behind us."

And some analysts are warning that commodities could be forming a bubble that will burst once the associated price gains are unsustainable.

"[O]ur biggest concern is that any bubble in commodity prices due to (quantitative easing) is likely to burst far sooner than is the case for equities or bonds," John Higgins, of Capital Economics in London, wrote in a research note. "[H]igher commodity prices will undermine demand from firms and households (and weaken economic growth) in a way that higher equity or bond prices will not."

But hedge fund manager Dennis Gartman, writing in his Gartman Letter, noted that the EPA news might otherwise be a bit bearish for corn. In this weak-dollar climate, though, it doesn't seem to matter, indicating that corn prices could keep rising.

"In a different environment, this would be bearish news; in the present environment, 'who cares?'" he says. "In the present environment, the attitude is, 'The dollar's weak; buy's all goin' up!' Such is the madness of the time."