Can Corn Prices Make a Comeback?

Corn prices have slumped some 24% since January and more than 50% since hitting a record high $7.65 a bushel in June 2008. Now they are being further threatened by potentially the largest corn harvest in history.

Still, there's reason to believe that corn prices will rebound.

The summer season could be particularly harsh following a better-than-average spring, and rumors that China is gearing up to make a huge purchase so far has helped keep corn prices afloat – and could even send them higher. But before that happens there are some substantial headwinds for the crop to overcome.

Warm, dry weather across America's Corn Belt has helped farmers get a jumpstart on the season. With 68% of their corn – about 60 million acres – already planted, U.S. farmers are operating at a record pace. In Iowa, the nation's biggest corn producer, farmers have already sown 85% of their crop. Traditionally, these farmers would only be half way through their planting.

"This year is the earliest I have ever planted corn," Mike Hornick, a lifelong Iowa farmer, told the Financial Times. "It was the earliest I ever finished. I'm real happy – there's a big smile on my face."

Farmers and agronomists say that an early planting season will hasten pollination and preempt the potentially damaging summer heat.

More than 13 billion bushels of corn are expected to come on to the market this year, and that's on top of the 2 billion bushels left over from last year's harvest. The positive outlook for the harvest drove corn prices down from $4.50 in January to $3.40 a bushel in March. However, futures have rebounded as of late, to about $3.75 a bushel.

Analysts and farmers alike recognize that there is the potential for a supply glut when the corn is harvested later this year, but they also believe that increased demand could salvage corn prices – perhaps taking them as high as $5.75 a bushel.

"The fundamentals for corn don't look very good right now," Gordon Wassanaar, an Iowa native who has worked 50 years as a farmer, told the Des Moines Register. "But we're in a different world from 10 or 20 years ago."

Why Corn Prices Could Stalk Higher

One of the things that recently changed is that China, the world's second largest producer and consumer of corn, is on its way to becoming a net importer of the grain.

The last time China was a net importer was 14 years ago, when drought reduced its crop. And a similar situation is unfolding this year. Chinese corn production plunged 13% last year because of drought. The country lost some 25 million tons of corn by some estimates, taking its production to a four-year low.

Dry, cold weather this year has slowed plantings, further threatening production. Current climatic conditions could reduce China's 2010 corn production by 1%.

China in April bought 115,000 tons of U.S. corn due for August delivery. That was the country's first significant purchase of U.S. corn since 2001.

"The possibilities are increasing that China will buy more corn from the U.S.," Jerry Gidel, a market analyst for North American Risk Management Services Inc. in Chicago, told Bloomberg. "U.S. corn looks pretty cheap."

The juiciest rumor, Don Roose of U.S. Commodities told the Des Moines Register, is that China will buy up to six cargo ships worth of corn, or about 14 million bushels, which equates to 392,156 tons.

"That still isn't enough to really move the market," Roose said. "But the psychology is what is important now."

The possibility alone that China will be forced to make another hefty purchase of U.S. corn has been enough to keep the market afloat in the face of adversity, according to Roose.

"We've had a strong dollar, a fall in the price of oil, and the prospect of a bumper crop on top of 2 billion bushels of surplus corn, but corn still held steady," he said.

What's more, though, is that there's still the possibility that this year's corn harvest won't meet expectations.

"I remain skeptical about the way the market approaches early-season prospects," said Lewis Hagedorn, an agricultural commodities analyst at JPMorgan Chase & Co. (NYSE: JPM).

Scott Irwin and Darrel Good, agricultural economists at the University of Illinois, told The FT that excellent weather conditions could result in a record 172.5 bushel-per-acre yield, pushing new crop farm-gate prices down to $3.20 a bushel. But poor weather late this year could cut yields to just 134.5 bushels per acre, sending prices to $5.75 a bushel.

However, regardless of the short-term gyrations, most analysts agree that prices will rise over the next year. Goldman Sachs Group Inc. (NYSE: GS), which sees corn prices holding at their current level of $3.75 a bushel for the next three months, predicts prices will surge to $4.50 over the next year. That's higher than a recent price of $4.12 for the May 2011 futures contract.

"We anticipate appreciation in corn prices over the next year owing to rising fuel-related demand and an expected return to trend yields, which will likely leave U.S. and global stocks-to-use ratios in decline." said the investment bank. "Current prices are providing a compelling opportunity for consumers to layer in upside protection."

Corn's stocks-to-use ratio is a gauge of supply and demand, and the "fuel-related" demand Goldman references is an allusion to the amount of ethanol that's blended with regular gasoline. The U.S. government could soon mandate that regular gasoline be comprised of 15% ethanol, up from 10% currently. That would introduce another 7 billion gallons of corn-fed fuel to the gasoline market.

Investors that want to avoid the more complex and volatile futures market could consider stakes in such agricultural producers as Corn Products International Inc. (NYSE: CPO) and Archer Daniels Midland Co. (NYSE: ADM), and Bunge Ltd. (NYSE: BG).

News and Related Story Links:

• Financial Times:
  U.S. faces bumper corn season
• Des Moines Register:
  With seeds in ground, what prices will emerge?
• Bloomberg:
  Corn Jumps to Seven-Week High as China May Boost Grain Imports
• Money Morning:
  Agri-Biotech Monsanto Buys Brazilian Corn-Seed Company
• Money Morning:
  Food Prices Soar as Farmers Bail on Corn
• Money Morning:
  China-U.S. Trade Relations Plagued by Protectionism
• Money Morning:
  How to Profit From the "Fertilizer Wars"

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