“Hopefully I won’t die by having a heart attack in the hog lot and having the hogs eat me; that’s my only fear.”
—Ruth Campbell, Farmer
It’s been a hard year for farmers in the United States.
In the fall, declining grain prices cut U.S. farm sector profits to their lowest levels since 2010. This year, net income for farmers is expected to plummet 30%, as corn and soybean prices are consolidating at 10-year lows and expenses such as land and machinery are growing. This is what the U.S. Department of Agriculture tells us.
The Ghost of Tom Joad
Farmers are crying poor again. There is blood on the scarecrow, and Tom Joad can’t pay his rent…
On the flip side, I don’t think I’ve ever heard of a farmer bragging about his riches. This is the nature of farming, I guess.
You never hear about the multi-billion dollar corporate farms, or the people who rent out Grandpa’s wheat acres and live like kings 2,000 miles away on the water in Annapolis, or those who made millions from selling fracking rights or cornfields to housing developers.
Don’t get me wrong; farming is a tough gig, and I certainly have no desire to have a heart attack in a hog pen…
But if you didn’t make a killing as a farmer over the past 10 years, you should try something else.
We are coming off a five-year spell during which crop prices generated record profits.
Three years ago, Corvettes were selling faster than they could be delivered to Iowa. Caterpillar and John Deere were selling like chewing tobacco.
You didn’t hear any complaints when the price per acre of farmland went up 469% in 10 years.
Crops are cyclical commodities. Corn and soybean prices started falling in 2013. As a result, farm income dropped.
The most recent USDA net farm income estimate showed record-high income in 2013 but a 23% drop in net farm income for 2014. It is expected to fall another 30% this year.
The market is one of record corn production with no increase in demand — as well as a leveling-off market for ethanol. We now have the lowest prices in six years: $3.80 a bushel, down from an all-time high of $8.49 a bushel in August 2012.
Caterpillar saw its profits fall 55% in the fourth quarter.
Buy Low, Sell High
As you can see by the five-year Teucrium Corn Fund (NYSE: CORN) ETF chart, we are at levels not seen since 2010.
The more recent one-year chart shows the price is moving off the bottom and is now above its 50-day moving average and looking to break out.
The MACD has crossed below the zero line, which is bullish.
The last time this happened, the CORN ETF went from $24 to $28 in three months. This time, it will likely move higher faster. Here’s why…
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All the Bad News is Priced In
Three years ago, the price of corn was twice as high as it is now, at $7.63 a bushel. This was due to a massive drought in the Midwest coupled with high ethanol requirements in gasoline, which have since been cut back by the EPA.
The high price of corn lead to the culling of livestock herds and farmers planting more corn.
The cycle has now rolled along, and corn is now priced at $3.80 a bushel. But it is rising off of a five-year low and ready for the next ramp up.
Beef Prices are at Record Highs
The livestock herd is coming back, which means more demand for feed.
There is talk of ending the ethanol mandate in Congress, but this will go nowhere due to Iowa’s power in the presidential election cycle. This could provide a relief rally.
And here’s something that’s potentially huge: China just ended its ban on GMO corn imports. In December 2014, China approved imports of American-grown Viptera corn developed by Swiss-based Syngenta (NYSE: SYT), known as MIR 162, overturning a 2013 ban.
Specific deals for import approval from the U.S. are tentatively expected as soon as April. This doesn’t mean the floodgates will open, but it represents a possible catalyst for corn price improvement.
Russia is also talking about restricting wheat exports, and this coupled with the civil war simmering in Ukraine means people may switch over to corn.
Furthermore, recent farm surveys showed more soybeans planted and fewer corn acres.
How to Play It
It’s a good time to consider buying corn at the bottom and holding into a price rise next year.
In my trading service Options Trading Pit, we bought calls to leverage up any short-term move over the next few months.
Good hunting,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
