Friday, April 4, 2008

Corn Prices Surpass $6 A Bushel: Investors, Grab Your Overalls

Corn prices have jumped dramatically during the past few months, hitting a record high of more than $6 a bushel. Demand for corn has increased, and the outlook concerning whether future supply can meet this demand is uncertain. This news is great for agricultural farmers, at least agricultural farmers, but it will have several negative repercussions for just about everyone else. Corn and corn-based additives—such as corn starch and corn syrup—are used in many foods and in animal feed for pigs and cattle. An increase in corn prices is one of the driving forces behind the price increases of numerous other foods.

The use of corn in ethanol production is also driving up the price of corn. The government recently passed legislation calling for more ethanol production, which could result in even higher corn prices. I wrote about the validity of ethanol as a long-term alternative fuel source in a previous post, and you may want to read it for more insight.

The harsh weather in the Corn Belt region is also having an impact on corn prices, but this phenomenon may only affect this year’s crop. A bigger issue could be the amount of land being dedicated to corn production. This year there is expected to be around an 8 percent drop in the amount of farmland planted for corn according to a recent AP article. You may recall that last year, farmers increased the amount of farmland planted for corn quite dramatically in response to the then-record $4 a bushel price. When time comes to plant crops for next year, we can probably expect to see a similar increase, which should eventually help regulate the price a bit.

One thing to keep in mind is that there is only so much farmland, and if farmers choose to plant corn on that land it means they are doing so at the expense of some other type of crop. The last time farmers went to corn en masse, wheat and soybeans saw tremendous gains--maybe this will be an area of opportunity for investors once again in the future.

Investors who want to investigate the potential opportunities available with farmland investment, and see how they might profit from the rise of corn prices, should read our article: Farmland Investment.

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