Soybeans And Corn Just Hit Records
Simple but dry mathematics can determine the price of any given commodity with a far greater accuracy than some major world events. While major headlines like Russian geopolitics or deep-sea mining do plenty to move the commodities market up and down, economics textbooks prefer to analyze value based on a numbers-in and numbers-out approach. The stocks to use ratio, for instance, goes a long way towards predicting the increase or decrease in the value of agricultural commodities. This simple relationship between the quantity available and the quantity consumed allows economists to determine where supply or demand have failed to sync up, leading to higher or lower prices. As you may imagine, the quantity available outweighing the quantity consumed tips prices downwards, while more consumption makes for higher prices. With the quantities of both soybeans and corn having just hit record figures, there's no doubt that the stocks to use ratio for both these agricultural commodities will swing in a downward direction, making short-selling a fantastic opportunity for quick profit.
Leading The Pack: Corn
It should hardly be news that the US produces a lot of corn; a drive from Chicago to Denver offers enough evidence. Yet it's worth asking just why the United States has been such a fantastic agricultural success story when so few other nations prove capable of harvesting just a fraction of our corn husks. Given that yields in our nation have proven to be 20% higher per acre than in any other nation, one might think there's something in the water. Actually, it turns out there's something in out climate. Corn evolved in North America due to a confluence of two particular conditions of the geography: the Great Lakes and the receding glaciers of the Ice Age. The amount of moisture in the Great Lakes manages to keep summertime conditions in the corn belt moderate as evaporation leads to cloud cover and precipitation, while also generating strong winter snowstorms. Corn doesn't thrive as well in ultra-hot places, where rot and fungus make the crop fail. Snowier winters, in turn, lead to better planting conditions due to the number of weeds and insects killed off by snowdrifts rising three feet in the dead of February. The former glaciers that covered much of the northern United States flattened out the land and then retreated, taking away rocks and leaving a deeper, consistent soil. Farmers could hardly ask for better conditions to grow corn; former secretary of Agriculture Henry Wallace claimed that America's corn belt proved the most productive agricultural region in the history of human civilization. Indeed, the only thing that can slow down corn, it seems, is a competitor.
Moving Up: Soy
There's no shortage of things to like about soybeans, including the taste. An increasing staple of the American diet, soybeans contain a far greater degree of both fiber and protein than corn, creating a suitable feed for livestock that results in meat with less fat and cholesterol than corn diets alone. The same factors that make corn a slam dunk apply to soybeans (despite the fact that soybeans evolved in east Asia, where there are no Great Lakes and no former glaciers), which can thrive in cold weather and hot temperatures alike. While domestic demand for soybeans as livestock feed has risen -- only about two percent of all soybeans harvested will be consumed directly by Americans -- international demand has grown even more sharply. The United States now exports more soybeans to China than we do to the rest of the world combined after exporting almost no soy at all twenty years ago. Even the Chinese market slowdown hasn't yet reached soyfields of Illinois and Iowa, with higher growth in 2014 than in 2013 or 2012. Though soy has a slighter lower profit threshold than corn (the former retails for about $600 per acre, the latter $800 per acre), soybeans can be grown faster and require less manpower for harvesting than corn. While corn remains the number one by a large margin, soybeans surely represent the up-and-coming new blood.
Making Grain While The Sun Shines
With positive factors of growth and economics in place, 2015 had all the elements needed for a record harvest. The farmers of the US delivered, and then some. Corn's ending stocks of 1.7 billion bushels proved to be the third-largest harvest in the crop's history, while soybean ending stocks of 465 million bushels hit the national record. Despite flooding in the corn belt through the spring after the polar vortex's snow melted, the harvest that made it to market has demonstrated both the tremendous growing capacity of the heartland and the tremendous stocks sure to accumulate given the overwhelming quantity of supply. The market has already reacted: soybean futures have fallen by 1.5% for delivery in January, while the Chicago Board of Trade slashed corn prices by nearly two percent. Both reflect yearly lows in the commodity prices. Investors worried about missing the boat need not worry: the prices will drop further as the winter goes on, given that harvests on the other side of the planet (where seasons are reversed) will influence global demand.
- The Takeaway: there's no easier call to be made in all of investing than short-selling a commodity after a record harvest. Investors should look at short-selling six-month contracts for corn and soybean deliveries in order to capitalize on the unprecedented growth of US agriculture. Don't be frightened off by the meager asking prices, given the lack of available buyers: soy and corn alike will have a rough winter and most likely leave bulls on the hook for their optimism.
- While the historical lows make buying grain crops a value choice, there's little reason to think a rebound lies on the horizon. Projections for 2016 appear no less rich than current yields, making corn and soybeans investments a low-growth choice for all but the most risk-tolerant investors.