In about a month, I predict a new search term will enter Google’s Top 25 most-asked questions.
It will read: “Why is the price of corn so high?”
Right now, commodity prices are surging. I’m going to spend the next few days discussing this trend.
Today, I want to start with corn.
Now I understand if you don’t think corn is as important as oil.
After all, oil always generates headlines due to geopolitical tensions around the world.
Well, corn is in just about everything we buy. And prices are surging.
Take a look at what corn futures did between March and the end of April.
The chart below offers a historical look at corn futures prices between March and the end of May for each year dating back to 1973. The chart shows that, historically, there is not a significant amount of movement for most of these years.
However, in 2021, corn prices have surged. As you can see by the orange line near the top, December corn futures prices surged by 33% over those two months.
This rally is an outlier compared to historical price movements.
The last time corn prices exploded similarly was 1973, when U.S. inflation hit 6.22%.
It is clear that we have never seen a price movement toward the upside like this since the inception of corn futures prices. And we haven’t even pushed through May yet.
The Cure for Higher Prices
I’m sure you’ve heard the adage about high commodity prices.
The cure, as some economists say, for high prices is high prices.
What does this mean?
When prices are high, producers are incentivized to bring more of the commodity to the market. So, if oil prices move higher, energy producers like Chevron will pump more out of the ground. Or, in the case of high wheat and corn prices, farmers will plant more of these crops.
As a result, supply and demand should move back into equilibrium over time.
But 2021 is a little bit different. You see, there is a supply chain shock happening right now.
The Wall Street Journal reported yesterday that corn prices have increased by 50% since the start of the year. The price of a corn bushel has more than doubled since last year.
Why is corn that important? Well, it’s in everything.
It’s the No. 1 largest crop in the United States for a reason.
Corn is a key component in tortilla chips, Coca-Cola, bourbon, ethanol, makeup, and even tires.
It’s also a critical feed input for the dairy, beef, and chicken markets.
People might think that corn’s massive run is over. But we might only be in the third inning of this commodity surge. Here’s why.
Moving Grain
Corn is a global commodity, and the United States is the world’s largest producer.
But China and Brazil are up there as well in terms of significant production. China produces largely for itself. It also buys as much as possible from other nations. The U.S. exports a massive amount of corn to China. And China has been buying up as much as possible to satisfy its ever-increasing demand for pork and other meat products.
In addition, the weather in Brazil has been very dry over the last two months. That has raised speculation on the price of corn.
And there’s one more factor that I haven’t seen people discuss on a broad scale.
Since January, trucking companies have sounded the alarm about a shortage of drivers.
This trend has been going on for the better part of a decade. However, COVID-19, combined with increased government unemployment payouts, has fractured the commercial trucking industry.
Out west, the California League of Food Producers says there are 25% to 30% fewer drivers this year than in the past.
Farmers are struggling to get onions and tomatoes out of the fields. Since there isn’t a robust rail network in the region, almost everything needs to be moved by truck.
This is a huge warning sign for later this year. You see, corn isn’t like oil. It’s not something that can be produced in significant abundance year-round. U.S. farmers are right in the middle of planting season.
Harvest doesn’t start until July and goes through the end of the year.
The big question moving forward is whether there will be enough trucks to get the corn out of the field.
Farmers and hauling companies are already sounding the alarm about drivers across the Midwest. And unless there is a magical event that drops drivers from the sky, this could drive corn prices even higher in the months ahead.
How to Capitalize on This Trend
Investors might think that they are behind on the corn trade.
But we know that TradeSmith Finance can offer clear signals on what to buy and hold.
Here is the watchlist that I’ve started to build based on the corn trend.
CSX (CSX) is a U.S. freight rail company that will benefit from rising commodity prices. The company hauls a significant amount of grain across the United States. And with a shortage of truckers, it appears that rail operators like CSX can charge higher rates in the months ahead. The stock has been in the Green Zone since October. Over the last month, multiple Wall Street analysts have raised their price targets on the stock. Price targets range between 5.5% to 15.25% higher, according to TipRanks. I will spend some additional time looking at other rail stocks trending in the Green Zone like Canadian National Rail (CNI).
The Teucrium Corn ETF (CORN) is also in the Green Zone. This ETF tracks corn futures prices and reflects the huge gains in prices over the last year. Shares are nearly double from their 52-week low. While that might appear very expensive, it remains in an uptrend as momentum continues to push higher.
Finally, I am looking at Mosaic (MOS). As we move toward the end of planting season for corn, it’s important to note that farmers will look to plant more of the crop. Mosaic is a producer of potash and fertilizers. These are critical inputs into the planting of corn and other crops. The company had a bit of a mixed earnings report last week. However, shares are trading at an attractive P/E ratio near 13. The stock is in the Green Zone and has positive momentum due to the uptrend in recent months.
Tomorrow, I’ll be back to talk about ways to play the ongoing semiconductor shortage around the world. If you’re in the market for a new car like I am, I think you’ll enjoy this one.
