Sunken Crops Make Grain Prices Float High

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In the ancient Roman Republic, Marcus Crassus famously became the city's first millionaire (in terms of the sestertius, a coin that would buy a loaf of bread or a bottle of wine) by snapping up land at dirt-cheap value after the building upon it had been burned to the ground; some historians suspect Crassus sent gangs to burn choice buildings down whenever he desired a particular plot of land.  While economics does not always need to be a zero-sum game, the misfortunes of some can often benefit the portfolio of others, whether in ancient Roman real estate or in the modern commodities market.  The recent flooding of the Mississippi river valley proves this truism anew: while devastating to rural farmers, the floods have created a shortage of crops that, in turn, has sent the price of grain commodities skyrocketing up to 52-week highs.

Giveth and Taketh Away

The third-longest river system in the world, after only the Nile and the Amazon, the Mississippi River has long been the economic and agricultural lifeline for middle America.  The first Spanish expeditions up the Mississippi 500 years ago recorded the abundance of natives who used the river as a highway to trade up and down; archeologists have found shark's teeth from the Atlantic coast in Montana while mica stone from the Appalachian Mountains are common in grave sites throughout Illinois and Missouri.  When the French came to control the river system, they built a number of cities that have long since been anglicized, most notably Detroit (meaning strait in French).  During the Civil War, the Anaconda Plan utilized the Union navy to cut off Confederate trade running up and down the river, effectively slicing the Confederacy in two after the siege of Vicksburg, arguably the greatest turning point of the war.  Today, some half a trillion dollars worth of shipping runs up and down the Mississippi each year, supporting over a million jobs through a dozen different states.  The river is remarkably tame for the most part; exceptions include the famous 1812 Memphis earthquake, where the river ran backwards for a day.  Compare the Mississippi to the Nile, where seasonal floods are the norm rather than the exception and necessitated building the Aswan High Dam, and it's clear that there's not much reason to worry about overflow.  Only rarely do floods threaten the river, approximately once every decade, but rarely is not the same thing as never, and this winter's record rainfalls pushed the river to its brink and beyond.

Build Thee An Ark

December came with lots of precipitation for middle America.  While not record-breaking, excessive rainfall (as much as 20 inches in some locations) throughout Missouri, Arkansas, and Oklahoma led to massive outflow into the main river drain.  The Coast Guard had to be dispatched inland to retrieve stranded vessels and get supplies to inundated communities, declaring an 80-mile stretch of the river to be closed in order to minimize risk; the agency's web page still recommends all non-essential boat travel on the Mississippi be postponed until a later date.  The rising water affected a number of businesses, including shutting down the St. Louis harbor, but none more poignantly than farmers.  Some crops still in the fields went underwater; many more stored in grain silos, elevators, and warehouses were wiped out by flooding in the southern Mississippi valley.  Arden Mills, the US' largest flour mill, had to close up shop.  While farmers scrambled to find dry warehousing, the warehouse companies scrambled to find farmers with surviving crops.  One farmer reported to Reuters that you would think corn was quoted at ten dollars a bushel (nearly three times the current price) given the rush to connect buyers and sellers in the aftermath of the flood.  Only one month earlier, a standoff between farmers and wholesalers had emerged due to the low price of grain; today the roadblock appears to be swept out to sea. 

Market Mayhem

The flood pushed a number of grains upwards by significant figures.  The cash premium for soybeans jumped by a full seventy cents per bushel, a gain of almost ten percent in the span of just a few days, while cash bids rose by ten cents per bushel.  Corn surcharges, sitting at only 37 cents a month ago, jumped to 49 cents; cash bids for corn rose by five cents per bushel.  The fear of being unable to fill orders has put grain distributors into a scramble, willing to pay a premium.  At a time when many agricultural stocks are facing seven-year lows, due to consecutive years of bumper crops and the threat of cheap overseas grain, it's a major departure from the bear forecasts that have dominated grain commodities for the recent past.  The Bloomberg Grain Index jumped by nearly a full percent; wheat futures gained two percent; soybeans and corn gained just under .5% on the futures market.  The Mississippi floods, it seems, have brought hardship with the right hand and opportunity with the left.

  • The Takeaway: the grain bubble will be brief but profitable.  The river valley that contributes to sixty percent of all American grain exports remains reeling from the effects of flooding.  Investors should consider snapping up grain -- especially wheat, but also soybeans and corn -- for delivery in the near future, ninety days or less, in order to capitalize on the shortage.  Remember that the driest month of the year for much of the Midwest is January itself, meaning that the boom won't last long enough to provide a prolonged recovery for grain.  Alternatively, consider shorting grain futures for delivery past April, once the prices begin to stabilize.
  • Which companies benefit from higher food prices?  General Mills is an easy answer (GIS on the NYSE, trading for $55.59 a share), as is PepsiCo (PEP on the NYSE, trading for $98.34 a share).  Consider short-term investment, as they too will ride out the bubble but likely won't be major engines for growth in the long term.

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