Based on some alarming global trends and abysmal policy decisions coupled with recent weather-related events in the mid-west, it is evident that high corn prices are here to stay and will likely continue to head north, in fact. While the high prices will spur a conversion to increased planting next year, it is simply too late to react in 2008 and corn prices will continue to skyrocket. There isn't much that can be done to combat the impending corn price spike, but there's an interesting contrarian play here...read on.

Alarming Trends:

Annual ending stocks of corn are continuously decreasing...

Source: Chicago Board of Trade

...While Chinese consumption continues to rise...

Source: Chicago Board of Trade

...Coupled with unprecedented flooding in the midwest...Corn prices have gone parabolic.

Source: Bespoke Investment Group

And don't expect a reversion to the mean in corn prices. Here's why:

A perfect storm in corn shortages was already in store this year prior to the horrendous flooding in the plains. Due to the abnormally cool weather in April and May, corn planting started 1-2 weeks behind the normal start, which already hits yield expectations.

In addition, we're seeing the emergence of an emerging market consumer yearning for meat consumption. Given the corn inputs to produce meat, we're looking at a potential runaway demand situation. Take China for instance. While China has generally been able to produce enough corn annually to satisfy its needs, it looks as though next year may buck the trend and China may become a net IMPORTER of corn. What this means for the global supply of corn is drastically higher prices given their substantial volume of overall global demand.

Source: Chicago Board of Trade

So, how can an investor capitalize on this trend?

If you can access the London exchange, the most direct way without the use of futures would be the ETF CORN. Note that this trades on the exchange as LON:CORN. There are other commodity ETFs that contain corn, but given a 3% weighting or something to that effect, they're generally nothing close to a pure play on corn. GCC is the Continuous Commodity Index Fund, which has a nice mix of soft and hard commodities as reviewed here, but again, not complete exposure to grains and corn alone.

An interesting link between corn, chicken and meat pricing:

However, there's an indirect way to profit from impending corn prices (or even sustained high prices) which hasn't been priced into the corn futures in my opinion. That would be chicken consumption. Here's why:

• Hog farmers cannot continue to absorb the increased cost of corn and will soon begin passing on pricing in the cost of pork.


• There is currently a herd reduction underway to capitalize on the already high price of pork with the added objective of limiting supply in the future, which further justifies cost increases. This will drive meat prices substantially higher.


• Chicken is the most efficient consumer of corn. It takes only 2 pounds of corn to produce a pound of chicken, as opposed to 4 pounds of corn to produce a pound of pork. This allows chicken producers to increase pricing at a substantially lower rate than pork and beef farmers.


• Given the high meat pricing in relation to chicken, US consumers will start to further substitute pork and beef with chicken, driving increased demand and hence, profits for chicken producers.

While high corn prices seem to be a curse for the entire supply chain, chicken producers stand to benefit from this misery. The play is Tyson (TSN). Obviously, based on a recent share performance chart, this eventuality is not reflected in the market. As this pricing scenario plays out, you'll likely see arbitrageurs enter positions and bid the price up substantially.

It may just be worth considering this play to supplement your commodity portion of your portfolio.

Disclosure: The author has no position in the instruments and equities in the aforementioned article.