Investors: Bite into the corn boom

By Jon Markman

After decades of decline and disrespect, corn is suddenly the hottest commodity in America.

No longer just an ear to eat during the summer with salt and a square of butter, it's now considered the answer to all the biggest problems of the day, from energy independence to global warming. Politicians praise it, Wall Street supports it, foreigners envy it and farmers can't plant enough of it.

America's got yellow fever, so you just know there's a way for us cynical city folk to make a buck off it.

Check this out: Last week, the federal government reported that U.S. farmers intend to plant 90.5 million acres of corn this spring, which is the greatest amount of corn acreage since 95.5 million acres were planted in 1944. That's a 15% increase over the 2006 acreage of 78.3 million. Although every farm state has indicated it will grow more corn, the biggest boost will occur in the Southeast, where growers will switch from cotton. Elsewhere, farmers will switch tens of thousands of acres over from wheat and soybeans.

• 10 stocks to buy now

In plain English, there's a mess of corn on the way -- and the boom has a lot of unintended consequences that may not fit well with the primary agenda of those who believe in its role as a "green" alternative to imports of foreign oil and gas.

The corn industrial complex

The driver for the corn frenzy is a huge boost in government support for the production of ethanol, a fuel that can take the place of gasoline in many cars. The Renewable Fuels Association pegs current annual U.S. ethanol production at 5.6 billion gallons, but observes that an additional 6.4 billion gallons of capacity is either under construction or in development.

Now here is where the numbers get interesting. Bank of America analysts figure ethanol production will jump to 10 billion gallons per year in 2010, or double the level of 2006. The analysts believe that increase would require the production of an additional 2.25 billion bushels of corn per year, or about 21% of the entire 2006 harvest of 10.5 billion bushels.

The production of corn currently outstrips the added demand. But Bank of America analysts figure that the supply-demand balance will shift over the next year, pushing corn prices up by $1.50 or more by 2008 from their current perch at $3.54 per bushel. That would put prices well above the record levels of $4 per bushel last seen in 1995.

Since most of you are not corn futures traders, the reason you should care is that every $1.50 increase in prices adds around $405,000 in annual income to a typical 2,000-acre farm, according to analysts. It would mean a real secular change to the farm belt, allowing farmers to buy more seeds, pesticides and equipment -- and lifting the value of everything from Midwestern residential property to banks and retailers.

In other words, expect the new Corn Industrial Complex to become a major nexus of investment and of success in the Midwest at a time when the manufacturing economy is disappearing and even technology is faltering. It's morning in Des Moines, investors.

Catering to the caucuses

If you doubt that such a big shift could really occur, just cast your minds ahead a year and consider the importance of Iowa to the presidential aspirations of a burgeoning field of both Democrats and Republicans. In an attempt to woo the farm families whose support at caucuses will make or break many campaigns, current congressmen in the race are bending over backward to funnel federal grants and subsidies to the Corn Belt.

I hesitate to note that they're all ears, because that's just a cheap joke, but what else can you say about someone like Sen. John McCain, an Arizona lawmaker who has long complained about corn and ethanol subsidies, suddenly trying to cozy up to the cobs? As recently as November, 2003, Fortune quoted McCain as saying, "Ethanol is a product that would not exist if Congress didn't create an artificial market for it. No one would be willing to buy it. . . . Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality."

But by the middle of last year, his tone had changed a bit, according to an Associated Press report. "I support ethanol, and I think it is a vital . . . alternative energy source not only because of our dependency on foreign oil but its greenhouse gas reduction effects," he said in a speech in Grinnell, Iowa.

Continued: The other-end-of-the-bull market

 1 | 2 | next >