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Our banks may be sliding into a bottomless pit, our automakers may be careening off a cliff, our brokerages may be broke, our home values may in flames and consumer confidence may be shot, but darn it, there's always corn.
The United States grows and exports more ears than any other country in the world, and corn is fetching record prices, making this a golden era for a most simple product in complicated times. Almost 15 months ago, I called this to your attention with a column, "Bite into the corn boom," and recommended a set of stocks to take advantage. Those stocks are up dramatically -- as much as 400% -- since.
And now I'm back to observe, as they say down at the seed store, this thing ain't over yet.
If the flood disaster that struck America's heartland this month reminds us of anything, in fact, it's just how important the annual corn crop is. With river transportation shut down and hundreds of fields inundated, corn production this summer in large parts of Iowa, Illinois and Missouri looks like a wash, and the resulting scarcity has pushed futures prices to $7.50 per bushel. That's a level that would have seemed outrageously high in the first six years of this decade, when $2 a bushel was the norm.
Higher prices have been terrible news for buyers and users of corn -- such as ConAgra Foods (CAG, news, msgs), ethanol refiner VeraSun Energy (VSE, news, msgs) and anyone who bakes or eats cereal -- but it's great news if you're in the fertilizer business. Farmers getting ready to determine their plantings for 2009 naturally focus on plants that will bring them the highest reward, and no crop requires more fertilizer than corn.
Lend me your ears
How can I recommend the fertilizer companies now, after shares are up such ungodly amounts in the past five years? It's easy. Unlike banks and brokerages, whose business models are broken, fertilizer makers are absolute earnings machines, with no end to their golden goodness in sight.Show me another industry where earnings per share, not just the stock prices, were up more than 100% in the past year and are expected to be up another 100% over the next year. So long as you believe that the current cycle of constrained supply and higher demand is sustainable, you have to love the prospects of this group.
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One of the best things about fertilizer used by corn farmers (the main buyers of fertilizer) is that corn is vital to three very different market segments: food for people, feed for livestock and, as ethanol, automotive fuel. Although total global demand for corn is growing at a 3% annual rate, each of these market segments has had a different reaction to elevated price levels. Consider:
- Food. People have to eat. For this reason, food demand has been relatively inelastic over the past few years as corn prices have increased from around $2 per bushel to their current perch just over $7.50. A lack of alternatives leads to little correlation between corn prices and corn-for-food demand. In other words, people don't stop eating corn just because it costs more. Demand will remain steady.
- Feed. Cattlemen and ranchers are extremely sensitive to feed prices; feed is their biggest cost. Demand destruction is well under way, with the U.S. Department of Agriculture expecting demand for feed corn to fall by 16% to 5.2 billion bushels next year. This represents the lowest rate since 1996. Higher prices have led many livestock farmers to resort to higher slaughter rates and smaller herd sizes, which has lifted meat prices.
- Fuel. Biofuels have become the price setter for corn. The Renewable Fuel Association estimates 4.4 billion gallons of ethanol capacity is under construction; current capacity stands at 9.3 billion gallons. The USDA expects marginal corn demand from ethanol plants will come in at 1 billion bushels next year, offsetting the contraction in feed corn almost perfectly. In fact, the relationship is so strong that Citigroup equity analyst Brian Yu finds a nearly perfect 1-to-1 relationship between the economics of running an ethanol refinery and corn prices this year. That is, corn prices have been set at the maximum refiners could afford without taking an operating loss.
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Floods to push up corn pricesThe floods in the Midwest are projected to reduce the corn harvest by 700 million bushels. Look for higher prices on meat and soda, and more ethanol imports from Brazil, MSN Money's Jim Jubak says.
Continued: Outlook for corn prices
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