Profit From The Bull Market In Corn

| April 28, 2008 | 0 Comments

In Friday’s article we discussed the poor state of the ethanol industry. We also touched on how the industry’s being impacted by rising corn prices.  Corn, it seems, is becoming a mini celebrity.  Everyone’s been watching prices move to new highs.  And everyone’s riding the corn bandwagon.

Farmers are celebrating the high prices.  Speculators and traders are jumping into the markets looking for fast money.  Environmentalists are still trying to decide if ethanol from corn is “good” or “bad.”  Government officials are even getting in on the debate as they get to complain about food inflation.

Now, you don’t need me to tell you how important corn is.  It’s one of the most important food products in the United States and for a significant part of the world.  Corn is the largest crop in the US.  We produce about 170 million metric tons annually – almost half of the world’s total production.

A little background.

Corn was first domesticated around 9,000 years ago in Central Mexico. Its use spread throughout the Americas, and continued on to Europe in the 16th century.  The corn we traditionally think of – the kind we eat at BBQs and picnics – is known as sweet corn.  Popping corn is another genetic variety.

Amazingly, the corn you and I consume is just a tiny percentage of the total crop.  The vast majority of corn production is of the dent and flint varieties.  Dent and flint corn is used either as animal feed or for industrial products.

According to the US Department of Agriculture, almost 70% of corn is used as feed for animals.  Corn can also be processed into other useful products like corn starch, corn syrup and ethanol.

Corn is a picky crop.

Planting conditions need to be just right. As a matter of fact, right now market speculators are spending more time watching the weather channel than CNBC.  This year rains are delaying planting schedules.  The longer it takes to get the seeds into the ground the lower crop yields will be.

Making money on corn – futures or options?

Corn trades primarily on the Chicago Board of Trade where investors, speculators, and industry participants can buy and sell futures.  For those of you who don’t know, there is a big difference between a future and an option.

Both futures and options allow you to use leverage.  And both can provide big profits.  With an option you own a right but not the obligation to complete a trade.  This means if you bought an option on settlement day it’s your decision to complete the transaction.

A future is different.  If you own a future on settlement day you have an obligation to settle the transaction.  If you own a Corn future, you might find yourself the proud owner of 5,000 bushels.

Now with any trade it’s important to know what you’re buying.  One contract of corn represents 5,000 bushels.  Just so you have an idea, each bushel is about 56 pounds (husks and cobs are removed).  Corn trades by the quarter cent which is $12.50 per contract.  So a penny move in the price of corn moves the value of a contract up or down by $50.

Some investors don’t know this, but the exchange limits how much corn prices can move.  These limit levels prevent prices from getting out of hand when important news or events occur.  For corn the maximum move is 20 cents.  So when prices move by $0.20 in a day, all trading stops.  If you want to trade you will need to wait for the next day.

Futures trading can be complicated.

If you still want to invest in corn, but don’t want to use options or futures, there’s an easier way.  A number of Agricultural ETFs have been created.  They track the movements of a variety of commodities.  One is the PowerShares DB Agriculture Fund (DBA).  This fund holds a basket of commodities including Wheat, Soybeans, and Sugar.  More than 24% of the fund is invested in Corn.  So if you’re looking for a safer way to invest in corn, this ETF might be a good choice.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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