U.S. Markets closed

Exports, Ethanol, Expectations to Keep Corn Prices High: Trader

Fin - Breakout - US

Corn inventories are down 15%, but corn plantings will only rise 5% this year. What's wrong with this picture?

That's a thumbnail encapsulation of this morning's Prospective Plantings report from the U.S. Department of Agriculture, which showed farmers will sow 92.2 million acres of corn this year, "the second-highest planted acreage in the United States since 1944, behind only the 93.5 million acres planted in 2007."

But trader Tres Knippa of Lotus Brokerage points out that there are a few key current dynamics that are having a huge impact on corn. Specifically, that government-backed ethanol producers now consume 40% of the nation's corn crop, while a weak dollar and strong demand from new markets abroad is causing more agricultural exports. Crop yield is always the wildcard, as there is no way to predict the weather but an in-line forecast is baked in.

It all boils down to what we have in storage, Knippa says. "Right now, the big story is — how much corn do we have in the bins, in storage, in carry-out?" He says we need 93 or 94 million acres planted just to maintain what we have in storage; any reduction in those acres makes that corn availability dangerously low. As the number was revised downward, we're closing in on $7 for corn. And, as Knippa says, as the price rises, the prospect of the government getting flack for using 40% of it for ethanol production will also rise.

And it's not just corn that's been on fire. Cotton, wheat, soybean and sugar are up anywhere from 50% to 150% in the past year. While that's clearly good news for the struggling family farm, they are having a mixed reaction on different ag-related industries. Fertilizer and tractor sales should be strong, with shares of Potash (POT), Agrium (AGU) and Deere (DE) all rising, while meat processors such as Tyson (TSN) and Smithfield (SFD) are taking a hit.

On cotton, Knippa says, "It all boils down to one thing — what is going to happen in the Chinese economy? If the Chinese continue to import our cotton like crazy, then cotton prices are going to be really hard to break." If the Chinese economy is slowed, this would put pressure on cotton prices overall.

The question most salient to consumers: Will wholesale price increases will make it through to the retail level — and stick?

We want to know what you think. Send us an email with your comments and questions to breakoutcrew@yahoo.com.