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The bull argument for corn

10/07/2011 @ 1:58pm

After plunging $2.00 it may be difficult to argue a bullish picture for corn. As we look ahead to next year, we'll lay out the track for a potential strong bull market. Last week we discussed the bear argument for corn and this week we'll explore variables that support a bullish outlook. The strongest argument is that the world just doesn't have enough supply. The recent plunge is related more to world economic concerns than supply increases. Commodities and stock prices have been correcting to the downside for nearly six weeks. Once this selling ends, corn users are likely to take a serious look at their needs and begin buying in earnest to secure inventory.

This may be especially true for foreign countries such as China. The United States Grain Council recently estimated China will import between 5 and 10 million metric tonnes of grain in the year ahead. This is a substantial increase from this past year in which China, for the first time in four years, imported U.S. corn. Expectations that China could import as much as 15 million metric tonnes of corn by the year 2015 will continue to fuel underlying speculative buying when prices set back. The investment community has an appetite to buy commodities on a price drop. Until China has confirmed that it either has enough inventory of its own or the economy just can't support importing corn, it's likely that price declines from this point forward will spur export activity.

World stocks-to-usage figures for corn rest at 40-year low levels. This implies the world is snug on inventory and that, unless the U.S. in 2012 can produce a monster crop, world demand could again out-strip world supply. The September USDA Supply and Demand report forecasted 2011/12 world production at 854.7 million metric tonnes and world usage at 862.58 million metric tonnes. Production increases in Argentina, Brazil, and the U.S. are likely, though bear in mind that weather conditions need to be ideal in order to grow inventories. The last couple of years have reflected increased weather variability. If this pattern continues, this would suggest another challenging year for producers in 2012.

Investment interest for commodities by money managers has been on the rise the past decade. As the world shrinks, its ability to rapidly move grain through increased communication, trading and shipping channels increases the likelihood that trends can change on a dime. Therefore, investors will be seeking commodities that are considered bargains rather than stay on the sidelines as some have suggested. Money will see opportunity and commodities will remain an important part of many investment portfolios in the foreseeable future.

Corn prices reached record highs this past year, so if a recovery begins, projections for $8.00 or $9.00 corn will now seem reasonable and likely generate more aggressive buying by both speculators and end users.

If end users learned one lesson over the last 12 months, it's that when corn stocks are snug and prices migrate toward or below the cost of production, they should be buying for the year ahead. As September came to a close, corn prices dropped 25% in value from late August, while deferred live cattle and hog futures were quietly moving higher, in some cases record high prices. U.S. and world supplies are much too small. If rationing needs to occur, prices will rapidly advance into all-time new highs in 2012.

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