When the market is shocked with breaking news, prices move very quickly. For example, there was shock in the agriculture markets two weeks ago when the USDA slashed its forecast for a key agricultural commodity that is used in everything from food, food ingredients, animal feed and biofuels.
I'm talking about corn.
The lower production forecast was particularly bullish for prices, because an unseasonably wet and warm spring had expectations running high that 2012 would be a record year. But with a nasty bout of hot and dry weather sweeping across the Midwest, those rosy production projections took a tumble and sent prices soaring up more than 16% in the last 10 days -- not bad when you consider the S&P 500's 3.5% gain during that time. Take a look at the bullish movement in the chart below.
While those short-term gains are impressive, they pale in comparison to what has happened in the last two years, with prices up more than 70% on surging demand from emerging markets and depleted inventories. But until recently, this market was almost exclusively restricted to insiders and professional traders through the use of expensive and complicated derivatives. But Teucrium Corn (NYSE: CORN) changed everything. It's an exchange-traded fund (ETF) that tracks the price of physical corn through the use of futures contracts at the Chicago Board of Trade.
International and emerging-market demand for corn has been a huge driver of growth. The simple fact of the matter is that global population growth is creating more demand for food and food resources. In fact, the USDA is forecasting that China will import 4 million metric tons of corn in 2012, up from just 1 million last year. That's a 300% increase in one year as the growing country struggles to respond to surging demand from its newly-minted middle class.
That surging demand out of China has had a profound effect on inventories. In the United States, the world's No. 1 exporter of corn, inventories are falling at their fastest pace since 1996. That will push inventories to a 16-year low by the end of August and down a stunning 50% in just the past two years, a ccording to the USDA.
Inflation will also be a factor when investing in physical goods like corn. The Federal Reserve has made it very clear that it is fully committed to stimulating and supporting the economy. Other central banks, including the Bank of Japan and Bank of England, have done the same. This means weaker fiat currencies and stronger exports out of the United States, which would stimulate demand from the strong Chinese yuan.
Production levels will also play a key factor. For farmers to increase production, they will need to tap into new land in harder to reach areas in less climatic regions of the world. The "easy to farm" land goes first, so most additional acreage will suffer from diminishing marginal gains.
A great way to pay that bullish trend is with Teucrium Corn. Even though it's only been around for two years, launched in June of 2010, it has plenty of liquidity, with average daily volume of 88,000 shares. It also has a tight bid-ask spread that will prevent slippage in order execution. Its expense ratio of 1.42% makes it expensive in the broader world of ETFs, but if you want direct exposure to the price of corn, it's the only game in town short of using futures and options.
Risks to Consider: China is the swing factor that will have the biggest impact on the price of corn. In spite of the country's torrid growth in the past few years, some of its economic data has been coming in weaker than expected lately. This has driven concern that the country is moving into either a cyclical or structural slowdown. At this point, China's gross domestic product is still well in the green, but weaker demand from this emerging market would have a significant impact on the price of corn.
Action to Take --> Teucrium Corn is up more than 16% in thepast two weeks on unexpectedly warm and dry weather in the Midwest. But while specific weather events aren't predictable, it underscores a larger trend of production difficulties and growing demand from emerging markets like China. That has lifted Teucrium to a 71% gain in the past two years. But with inventories at record lows, shares still trade at a 20% discount from the all-time high of $51 in August of 2011, so now is a good time to buy.