Corn

The following is a guest post from Dr. Saif K. Lalani

(Disclaimer: I am precluded from making any specific recommendations in the securities markets. Dr. Lalani is not, and I have left his commentary intact. The following does not constitute investment advice in any manner, shape, or form. And yes, I own corn futures personally and in the fund.)

What can 5 "Bernanke Bucks" do for you?

Corn is the largest US crop in terms of dollar value. It is one of the things we can proudly say that we export. It also happens to be one of the 4 commodities that is set to go ballistic in 2008/2009.
Why? Read on.

Our policy makers have figured out that fighting the housing crisis and coming up with a productive energy policy was not a challenge worthy enough. How indeed could they make things worse? After all they are paid for a reason right? After months of contemplating they came up with the answer. If they could make food extremely expensive (along with everything else), then they would have a real challenge worthy of their mighty incompetence. And so they did.

The US energy bill has mandated huge amounts of bio-fuels to be part of our energy mix over the next 15 years. Ethanol distilleries are being set-up to absorb more than 40% of the US corn crop this year. If that does not scare you then perhaps this will. The US is by far the largest corn producer and exporter in the world. The US is often called the Saudi Arabia of coal. Well, in oil terms the US is the equivalent of - Saudi Arabia plus Russia plus Norway plus Iran and Iraq - for corn. The US single handedly exported 70% of the world's corn in 2006. My friends, that 70% is about to disappear. There is no nation on this planet who can compensate.

According to University of Iowa, the breakeven prices for Corn planted after Soybeans is about $4.00 a bushel. For Corn planted after Corn it is about $4.35. For Soybeans it is about $8.00 a bushel.

Considering the average yield of about 150 bushels an acre for corn and 50 bushels per acre for Soybeans you have earnings per acre of about:

$150 for Corn planted after Soybeans
$100 for Corn planted after Corn
$250 for Soybeans.
At current prices.

Now in 2007 farmers planted the largest corn crop ever. So most of the corn farmers are considering planting falls in the Corn after Corn category. Sure, you can switch acres around but there aren't enough acres around unless we develop three dimensional planting. Now if you were a farmer and had planted the largest corn crop ever and had to choose based on those margins what would you choose?
And remember there is also wheat, which is far more profitable than either of these choices competing for acreage. It is also highly likely that University of Iowa's calculations for breakeven costs may be on the conservative side. As Natural Gas prices break out to the upside we may see even higher prices for Fertilizer (required by corn, especially if it is following a previous corn crop).

So here you have a commodity where you can buy the long-dated futures for $5.00 a bushel where the downside seems to be extremely limited in the medium term. In addition you have demand in China growing at 15% plus a year. Sure demand growth may slow but 5% of a large number is still significant, especially as we have no capacity to increase supplies.

Corn is also an important commodity for other reasons. It is an easy way to hedge against a dollar collapse as well. Being an international commodity, corn prices will shoot up during a dollar crisis. Corn also enjoys strong political protection as U.S. Senators from the Midwest have a vested interest in keeping farmers happy. Finally, Corn has something that gold and silver do not. Unlike the latter, corn can actually be eaten. It is hence an excellent way of hedging your rising food costs for life. Do not be dettered by the fact thqt corn has risen over 100% since 2006. Corn at $5.00 is the equivalent of gold at $500 an ounce. Corn is still 70% below its inflation adjusted all time peak of $15 a bushel. And that is using the government inflation figures, which frankly are about as useful as Jim Crammer's rants. Using real inflation figures from Shawdowstats.com corn would have to climb over $40 to exceed its previous high. With every arable piece of land being used and India and China consuming increasing amount of poultry (which requires corn feed), a perfect storm is brewing for agricultural commodities in general and corn in particular." - Dr. Saif K. Lalani