🌽 Your Guide To Investing In Corn, A Surprisingly Versatile Agricultural Commodity
Corn (or maize) is arguably one of the most important agricultural commodities due to its versatility. There are actually 6 varieties of corn, but the most common variety is dent corn, which is the yellow cob we see in supermarkets. Not only is it for human & livestock consumption, corn’s byproducts & derivatives are used to make a whole range of products, like ethanol to be used for gasoline, alcoholic drinks, plastics, deodorants, crayons, batteries, etc.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding corn to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities.
💰 Profit. Although corn prices can be volatile, they also tend to show seasonal price patterns (assuming there are no shocks in the markets) during the autumnal harvest season, a period roughly covering September to December. Monitoring & taking advantage of these cyclical price swings can result in speculative gains.
What Affects Corn Prices
The price of corn can be pretty volatile. There are several key factors that are involved in moving the price of corn:
- 🇨🇳 Chinese Demand. Next to the US, China is both the world’s second largest producer & consumer of corn. It’s also the world’s largest consumer of energy and is expected to continue to grow as its economy grows. With the recent policy shift in becoming more environmentally friendly, they’ll likely be looking for alternative sources of energy, with biofuels contributing to this. So, demand for biofuels may rise as China continues to develop.
- ☀️ Weather. Weather can certainly have a big impact on corn prices. Unfavourable conditions like heat waves or excess rain can impact corn production, restricting supply, which may then lead to price spikes as we have seen in the early 2000s. This will continue to be the case unless heat-tolerant corn varieties are developed.
- ⛽ Ethanol Market. Corn is used to make ethanol for fuel mixtures. The main principle here is that when ethanol demand rises & becomes more expensive, along with US & EU subsidies for ethanol production, corn for ethanol becomes more attractive for farmers, rather than corn for food. This means less corn entering the food supply, which can lead to price increases.
- 🛢️ Crude Oil Prices. Because corn is used as a biofuel, it’s also essentially an energy commodity. So, there tends to be a pretty strong correlation between corn & crude oil prices. When oil prices increase, people may look for cheaper alternatives like biofuels from corn, which in turn, increases demand for it, and raises its price as well. It all comes back to ethanol production.
- 📈 Stock Levels. Stock/inventory levels can play a part in affecting corn’s prices. When a country uses its stock reserves, it suggests that there’s not enough supply to go around, which can then lead to speculation in the market. Alternatively, large stock/inventory levels will point to oversupply, which can depress prices. It all comes back to harvest season.
- 🏦 Market Speculators. Market investors/speculators can affect corn’s prices to an extent. Not only are there speculators in the corn market (speculating on supply from harvests & demand from China, ethanol, etc.), there are also speculators in the crude oil/energy market that can indirectly affect corn’s prices. We’ve mentioned above how crude oil prices can affect corn prices, and crude oil is arguably one of the most traded commodities with plenty of speculative investors about.
- 💵 US Dollar Strength. Like a lot other commodities, the benchmark for the pricing of corn is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more corn) & drive up demand, increasing prices, and vice versa.
🍽️📈 The 2007–2008 & 2010–2012 World Food Price Crises
As you can see from the price chart above, corn prices (along with a number of other grains like rice & soybeans) rose dramatically during the 2007–2008 & 2010–2012 world food price crises. You may or may not remember, but you probably paid more for your staple groceries necessities during this period. The reasons why remains to be a subject of debate, but there are established possible causes, some more established than others. For example, drought, heat & too much rain in parts of the American Corn Belt restricted supply, in addition to rising oil prices (needed for fertilisers & transport), which led to the initial late 2006 spike. After that however, prices really took off.
Some of the reasons why: general increase in world population growth & demand met with limited supply; which led to panic in the financial derivatives (futures) markets & therefore speculation; rising oil costs meant that biofuels made with corn rose too; & that the US & EU biofuel subsidies (tax incentives) meant that it’s more profitable for farmers to harvest corn for fuel instead of food, which further restricted supply. Basically, it was a mix of terrible weather conditions, increased demand from an increasing population & changing diets, oil prices rises & government policies & subsidies focusing on ethanol production.
What Is It Used For?
Corn is a versatile crop, so corn products & its derivatives are used to make a range of products.
- 🐄 Livestock Feed. One of the main uses of corn, used as food for the animals we then eat.
- ⛽ Fuel Ethanol. Another one of corn’s main uses, it makes ethanol, which is then mixed with gasoline to create fuel mixtures for cars.
- 🍬 High-Fructose Corn Syrup. Used to sweeten a lot of food and drinks products. Also known as glucose-fructose or HFCS in the ingredients label.
- 🍳 Starch. Used as a thickener in cooking, & also an additive in certain medicines.
- 🥣 Cereal. Pretty straightforward, a lot of breakfast cereals are made out of corn.
- 🍶 Alcoholic Beverages. Some beverages (both alcoholic & non-alcoholic) are made with corn.
- 🖍️ Others. Research & development have led to some pretty interesting things that are made out of corn. This includes plastics, batteries, deodorants, cough drops, crayons, etc.
The Case Against Corn
Corn is still a pretty volatile commodity with significant price swings as seen in the past. Since corn is used as a source of energy, it tends to be strongly correlated to energy commodities like crude oil. This means that further developments in renewable energy sources like solar, wind, hydro, etc. can potentially reduce demand for ethanol biofuels. Furthermore, increased government subsidisation could make corn too attractive for farmers, which could lead to overproduction, and therefore depress prices. Lastly, economic slowdown in the Chinese markets could potentially lower demand for corn.
The Case For Corn
Because of corn’s versatility and its use in the energy sector, there are many opportunities for corn prices to grow due to increased demand. US & EU government policies surrounding ethanol fuels has firmly established the increased demand, and has arguably led to price spikes in the past. As more countries are looking for cleaner energy sources (especially China), this demand will only continue to grow. Furthermore, as China’s economy rebounds from the pandemic, growing wealth may mean shifting food trends (increased meat consumption, which means increased demand for livestock feed) as well as greater demand for biofuels. Lastly, global warming can certainly affect crop production, which can restrict supply & therefore increase prices, unless more heat-resistant corn varieties are developed.
Popular Ways To Invest In Corn — Pros/Cons of Each
As an agricultural food crop, you can’t really invest in physical corn. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Corn ETF/ETNs. There are a dwq of options here. There are ETFs that invests in corn futures contracts, or ETFs/ETNs that invests in corn along with a number of other commodities. Note that for the ETF that invests in corn futures contracts, on occasion, there may be times when the actual price of corn & the price of the ETF share may differ since they invest in futures contracts, a derivative investment. Regardless, they’re traded on stock exchanges, so they’re very easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETF/ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF/ETN you choose, be aware of the fine print — the risks and costs.
- Corn Stocks. Unfortunately, there are no public companies that solely focus on producing corn, but There are public companies that deal in providing seeds, fertilisers & pesticides to farmers. Because of this, you aren’t directly following corn prices since there are other factors at play. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products they have, and potential product-line expansion plans.
- Corn Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell corn at a specified time in the future with an agreed-upon price. These futures contracts can be settled with physical delivery or with cash after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in corn can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. Not only is corn an agricultural commodity, it can technically also be classified as an energy commodity because of its role in ethanol biofuel production. Because of this, it tends to have a strong correlation with energy commodities like crude oil. By investing in corn, you’re essentially betting on the growth of ethanol markets, the Chinese economy, & increased adoption of ethanol government policies. However, there are factors at play that can depress corn prices, such as advancements in renewable energy sources (competing with oil & biofuels), the possibility of a Chinese economic slowdown which could decrease corn demand, or corn overproduction due to heavy government subsidies. That said, adding corn to an existing portfolio of commodities, or bundling it up with other commodities, can be a good way to achieve diversification. Furthermore, because it tends to also be cyclical following harvest seasons, it presents an opportunity for you to gain decent speculative returns if your analysis and timing is right.
🧺 If you are considering adding corn to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your corn position so you can take advantage of the volatility in the market. You may also want to watch prices during harvest season, as you can take advantage of the volatility during this period.
💰 If you are considering adding corn for speculation and profit, you may want to monitor the factors that affect corn prices mentioned above, especially developments in China. You may also want to keep watch of prices during harvest season as this tends to be a pretty volatile period. The USDA releases monthly reports of world production, consumption & stock levels, so you can keep track of supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on corn’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can also swing unexpectedly, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.