Tight Corn Crop Could Spell Opportunity for Investors

Justin Rohrlich August 29, 2011 12:15PM

    Instead of viewing this as a sell signal, it's actually an excellent opportunity to buy.

News of “record shortages” regarding this year’s corn crop may sound like reason for concern, but at least two industry insiders say not to worry.

The USDA’s last forecast expected yields of 153 bushels an acre and a 12.9 billion bushel crop, according to Bob Hoff of Northwest AgInfo Net’s Market Line. However, the Pro Farmer Tour estimates “production of 12.4 billion bushels on yields of 147.9 bushels an acre.”

“The word ‘shortage’ gets thrown around a lot, but I think people just really like to push that panic button,” Gary Truitt, president of Hoosier Ag Today, tells Minyanville.

“We’re still going to produce a very large corn crop -- not as big as we’d like to see, but my opinion is that we won’t be seeing any market disruptions,” Truitt says.

The reason for the lower yields, points out Truitt, has more to do with this season’s heat than the unusually dry conditions.

“Heat kills pollination,” he explains. “Pollen cannot exist when it gets to that 100 degree range inside a corn plant. I met with a farmer the other day, and his plants looked okay, but when you pull back the ears, there’s just not a lot of grain in there.”

It’s a situation that Jim Reed, president of the Illinois Corn Growers Association, also encountered this year. As he tells the Champaign/Urbana News-Gazette, “Our crops look very stressed. A lot of ears aborted kernels on the ends of the cobs. ... The number of kernels was not very good.”

However, Reed notes that the five-year trend line has “been moving up since the 1980s,” which means that the “low” corn yields we’re seeing are still higher than they were a decade ago.

While Gary Truitt believes it is “too early to be overly speculative” about the exact size of this year’s crop, he also thinks simple economics will smooth out most bumps the industry will encounter.

“It’s going to be tight, though as the price goes up, that’ll ration demand and the market will make adjustments,” he says.

Money manager Shawn Hackett sees the situation as a tremendous buying opportunity in the livestock sector.

“We’re going to have record low herd sizes next year,” he tells Minyanville. “Cattle herds will be the lowest in 40, 50 years. Chicken production is contracting dramatically as we speak. With those feeding units way down, next year’s demand will be way down.”

Which brings us to the crux of Hackett’s argument for optimism on the long side.

“You will be seeing absolute nosebleed-high, record-setting prices for livestock for a while,” he says. “But the weather won’t stay bad forever. The hope is that we’ll see record acreage out of Argentina and Brazil, and that we will plant record acreage here next year to make up for 2011. With demand down -- and cooperation from Mother Nature -- we could easily be looking at a feed glut and a crash in corn prices, setting up the perfect bullish storm as cheap feed meets record high end-user prices, setting the stage for record earnings, record margins, record performance.”

Offers Hackett: “Markets are usually anticipatory. If the back half of 2011 puts in a record high, the market will start to figure this out and we’ll likely see a big rise in the first half of 2012. Instead of viewing this as a sell signal, it’s actually an excellent opportunity to buy.”

Hackett expects outfits like Sanderson Farms (SAFM), Smithfield Foods (SFD), and Tyson (TSN), along with a “flier” like heavily-leveraged Pilgrim’s Pride (PPC) to be firmly in the sweet spot.

“Of course, the other side of this will have an effect on the Ruth’s Chris’ (RUTH) of the world,” Hackett continues. “Those people that went out for steak twice a week might cut back to twice a quarter.”