Investors purchase agricultural commodities, such as corn, for a variety of reasons, but the following are most common:
- Bet on Ethanol Demand
- Bet on Chinese Demand
- Inflation Hedge
- Portfolio Diversification
We discuss these reasons below, but if you are interested in where and how to trade corn, we detail that further on in this guide – along with regulated brokers available in . Please see the table of contents for more info.
Betting on Ethanol Demand
Consumption of biofuels including ethanol is likely to grow in the years ahead, and investing in corn is a way to benefit from this trend.
Over 60 countries, including the European Union nations, have ethanol targets or mandates in place, and this number is expected to grow as more countries seek cleaner energy sources.
Speculating on Chinese Demand
Chinese demand for corn is likely to grow for many reasons including:
- The country has targets in place to increase biofuel consumption in the years ahead.
- The country has over a billion people that it needs to feed.
- China’s growing wealth may lead to more meat consumption and greater demand for livestock feed.
How Does Corn Act as an Inflation Hedge?
Investing in corn is one way to protect yourself against inflation. Agricultural commodities, including corn, are certain to become more expensive if world economies experience bouts of inflation.
Overly accommodative monetary policies from the world’s largest central banks have kept global interest rates low and have created speculation in many different asset classes.
At some point, this speculation could show up in commodity markets, and corn prices could soar. A weak dollar, in particular, could create inflation and lead to higher corn prices.
Diversify Your Portfolio
Most traders are overly concentrated in stocks and bonds. Investing in corn provides traders with a diversification of risk in their portfolios.
Should I Invest in Corn?
Corn prices can be volatile, and traders should expect large price swings.
However, investing in corn can be part of a sensible plan to mitigate risk and diversify the composition of assets in a portfolio.
Investing in a basket of commodities that includes corn, other agricultural commodities, metals and energy can accomplish two goals:
- It can provide protection against inflation.
- It can protect a trader from the volatility of movements in individual commodities.
Including corn in this basket may make sense since it benefits from two massive economic macro-trends:
- Emerging Market Growth: China, India and Brazil are among the many fast-growing countries that will have enormous food and energy needs in the years ahead.
- Climate Change: Global warming is a positive catalyst for corn prices in two ways – It could lead to lower crop yields and it could increase demand for biofuels.
However, traders should also consider the risks of investing in corn.
- An emerging market slowdown could seriously limit demand for corn.
- Advancements in green energy sources, such as solar, hydroelectric and wind power, could reduce demand for biofuels.
- Heavy subsidization could lead to overproduction of corn.
What Do the Experts Think About Corn?
Experts see reasons for both optimism and pessimism about corn prices in the future. On the one hand, there is a massive supply of the commodity, which is creating a serious overhang on the market:
There’s too much harvest yet to come, too much corn being stored on the ground that will be pushed into the pipeline early rather than later.
– Matthew M. Pierce, director of commodity consulting, Futures International LLC
However, despite the oversupply, there may be reasons for optimism. Jason Ward, director of grains and energy at Northstar Commodity, believes corn prices have room to move lower as excess supply gets absorbed by the market. However, he sees a silver lining in the ethanol market:
… a lot of ethanol plants are in expansion mode. We need all of that because these corn yields, this year, are unbelievable.
– Jason Ward, director of grains and energy, Northstar Commodity
How Can I Invest in Corn?
Investors have several ways to invest in corn:
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs?||Security Costs?||Expiration Dates?||Mgmt Costs?||Leverage?||Regulated Exchange?|
|Corn ETFs (ETNs)||2||N||N||N||Y||N||Y|
The Chicago Mercantile Exchange (CME) offers a contract on corn that settles into 5,000 bushels or about 127 metric tons of #2 yellow corn. Traders can also deliver #1 yellow corn at a 1.5 cent per bushel premium or #3 yellow corn at a 1.5 cent per bushel discount.
The contract trades globally on the CME Globex electronic trading platform and has expiration months of March, May, July, September and December.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of corn.
Trading in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
Corn Options on Futures
The CME offers an options contract on corn futures.
Options are also a derivative instrument that employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of corn futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in corn futures to profit from their trades.
These financial instruments trade as shares on exchanges in the same way that stocks do. Only one ETF – Teucrium Corn Fund – offers a pure play investment in corn. The fund invests in corn futures contracts.
Other ETFs, such as PowerShares DB Agriculture Fund and UBS ETRACS CMCI Agriculture Total Return ETN, invest in corn along with many other agricultural commodities.
|Teucrium Corn Fund||PowerShares DB Agriculture Fund||UBS ETRACS CMCI Agriculture Total Return ETN|
Shares of Corn Companies
There are no public companies that are a pure-play investment in corn. However, traders that want exposure to corn prices may want to consider buying shares in large agribusinesses that provide seeds, fertilizers and pesticides to farmers:
|Monsanto||Global agricultural company that provides seeds, genomic and other products to farmers.||New York (NYSE)||1901||In 1983, Monsanto was one of four organizations who introduced genes to plants.|
|The Mosaic Company||Global agricultural company that sells crop nutrients to farmers.||New York (NYSE)||2004||Mosaic is the United States' largest producer of phosphate fertilizer and potash.|
|Nutrien ||Global agricultural company that sells fertilizer and feed products.||New York (NYSE)||1975||Nutrien was formed in January 2018 after the Potash Corporation of Saskatchewan and Agrium merged.|
One way to trade in corn is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of corn. The value of a CFD is the difference between the price of corn at the time of purchase and its current price.
Many regulated brokers worldwide offer CFDs on corn. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to corn prices without having to purchase shares, ETFs, futures or options.
Where Can You Trade Corn?
If you are looking to start trading corn and other agricultural commodities, here's a list of regulated options available in to consider.
Top Brokers Available in
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.