Let’s face it, how often do you hear people wanting to invest in corn? It’s precisely this that we wanted to share our view on corn as a potential long term investment.
“Stocks always go up” seems to be the mantra of the wave of new retail investors. And in our case, “stalks” always go up. Corn is the largest feed grain domestically and globally. In fact, corn accounts for over 85 percent of total U.S. feed grain production.
Why invest in corn? You may ask. Well, other than the diversification into commodities, corn is also uncorrelated to the stock market, traditionally. An alternative asset class, investing in corn can also potentially be a bet on green energy, specifically, ethanol demand.
In this article, we dig deep to understand the history of corn, where is corn grown in the world, usage and factors affecting corn prices. In addition, we discuss how to invest in corn via corn stocks/ETF and share our long term investment thesis on why investing in corn may be a good idea today.
History of corn
According to Wikipedia, Maize or corn is first domesticated by indigenous people in Mexico about 10,000 years ago. A staple food in many parts of the world, a maize plant is often 3m (10ft) in height, potentially growing to 13m (43ft) for some strains.
Corn is a warm-season crop, with spring time being the most conducive environment for planting. Particularly susceptible to cold/frost, corn requires 60-100 days of frost-free days to reach harvest, weather allowing.
Types of corn
The main types of corn are dent corn, flint corn, popcorn and sweetcorn.
Dent corn
A type of field corn with high soft starch content. This is the most widely grown corn variety in the United States today. Dent corn is widely used in food manufacturing industry, for example, cornmeal flour, chips, tortillas and taco.
Flint corn
Also known as the Indian corn or Calico corn. Flint corn has less soft starch than dent corn and comes in a multitude of colors. Usage includes cornmeal, flour and making hominy, a staple food in the Americas.
Popcorn
A frequent companion in movie theatres, popcorn is a variety of corn kernel that expands and puffs up when heated. Air-popped popcorn is naturally high in dietary fiber and antioxidants, low in calories and fat, and free of sugar and sodium.
Sweetcorn
Also known as corn in a cob, sweetcorn is known for its high sugar content. Unlike its other corn siblings that are left longer in the fields until dried out, sweetcorn is picked younger, hence juicier. Today, sweetcorn is engrained deeply in most cuisines, from snacks, main course to desserts.
Where is corn grown in the world?
Producing over 31% of corn, US is the largest corn producer. It also is the largest exporter globally by dollar amount, around 38%.
Interestingly, despite being the second largest corn producer, China remains a net importer of corn in order to satisfy growing local demand for corn. There is no surprise that Mexico is also a net importer, given the importance of maize in the region.
What is corn used for?
Historically, majority of the crop is used as the key ingredient in livestock feed. Today, corn is also processed into numerous by products we used in our daily lives such as starch, sweeteners, flour etc. Heightened usage of ethanol also continues to drive a stable demand for corn.
Factors affecting corn prices
Investing in corn involves a good understanding of the factors affecting corn prices. We breakdown the key determinants into supply, demand and general factors. In our analysis, we found macro factors to be a key driver of corn prices in the short term.
Supply side factors
Beginning stocks
This is the leftover stocks from previous year. Naturally, a higher beginning stocks would impact the current production in determining total supply. Additionally, large stocks can provide a cushion in a low harvest year and vice-versa.
Production
Production is the major component of supply. This is a function of the amount of acreage harvested and the yield per acre.
For producers, they seek to maximize their net return per acre relative to return for competing crop, such as soybeans. Consequently, government policies and subsidies can significantly influence production.
Finally, technological advances also play a key role in increasing corn crop yield, hence, production. Despite planted acreage remain fairly stable since 1980, yield per acre almost double over the period!
Demand side factors
Consumer preference
Changes in consumers’ preference can alter corn consumption pattern from time to time. For instance, the high prices of refined sugar means that corn syrup is seen as a cheaper and healthier substitute, boosting demand for corn and corn related products.
Meat demand
A major component of livestock feed, its demand is a function of the number of animals depending on corn as feed. Hence, meat demand. Broadly, increase in GDP per capita correlates positively with meat consumption and hence demand for corn.
General factors
Weather
Although not strictly macro, weather introduces a significant uncertainty on the supply of corn. Bad weather can potentially push up prices given growing demand.
FX
Given US is the leading producer in corn, a strong dollar may hamper global demand as this increases the relative prices of corn and corn-related products.
Substitutes
Supply and demand are affected by substitutes. For example, the soybean-corn ratio is a tool for farmers and producers to determine the which crop is likely to maximize profitability. As a rule of thumb, the dividing ratio between soybeans and corn is ~2.4:1. The higher the ratio, the more attractive soybeans are to grow and vice-versa.
Why investing in corn can be a good long term investment
The investment thesis for and against corn are well-studied. In particular, the key shorter term drivers, which includes weather, strength of US dollar, governmental policies and subsidies etc. While we acknowledge that these factors increase volatility in US corn prices, we refrain from forecasting given the huge uncertainties.
What interest us as a long term investors is the trajectory of corn prices. We list down to events that may shift the industry significantly and impact US corn prices.
Federal legalization of cannabis
With federal legalization of cannabis arguably imminent, cannabis is beginning to look a lot like a commodity crop. Indeed, in many states where recreational use have been decriminalized, cannabis is posing a dilemma to farmers seeking to maximize potential return.
While the legalization on a federal level remains a key political uncertainty, there are already evidence that farmers have been shifting gradually. Naturally, this means less acreage for corn. All else being equal, we think US corn prices may suffer supply side issues given where it is trading today. Our calculation indicates that a ~10% reduction in corn acreage may increase prices by ~15%.
China's growing corn demand
We expect a stronger demand for US corn from China driven by US-China Phase One trade deal and the recent coronavirus crisis. Despite being far behind its commitments, China bought ~1.8m tonnes of US corn. This is the largest sale of US corn to any buyers in three decades, according to USDA. Additional tailwinds are also expected to derive from growing population and pent-up local meat demand due to virus fears over meat imports, increasing the need for livestock feed.
Ultimately, we think the differences between China’s soaring corn prices, +20% since the coronavirus pandemic, and US’s -12% over the same period, offer a contrarian bet on US corn.
How to invest in corn?
Gaining exposure to corn has been more accessible over the years. Here are a few ways to do it.
- Corn stocks
- Corn futures
- Corn ETF
Corn stocks investable universe
Excluding futures, here a few stocks and ETF investors can gain corn exposure.
Summary
The awareness of supply, demand and non-market factors affecting corn prices is key when investing in corn. Furthermore, commodities investing also introduces a greater political risk relative to company stocks.
Balancing both headwinds and tailwinds, we highlighted two key catalyst on why US corn will appreciate in the longer term, namely, the federal legalization of cannabis likely leading to reduced supply and China’s growing demand driven by increasing population, meat and livestock feed demand.
In addition, we believe investing in US corn can provide an uncorrelated source of alpha to the portfolio. Given our investment approach, $CORN ETF would be the most economical way to gain exposure.
Heightened political uncertainty, coupled with the upcoming US Presidential Election in November means this could provide us with a better entry point into corn than today. We will continue to monitor both USDA published corn data and political developments. Please check our portfolio page for the latest updates.