Are high corn prices here to stay?

Posted on 23 July 2012 by Douglas Chadwick

Last week I had a breakfast with a business friend who resides in Lithuania and deals in fertilisers. Not the political variety, but potash which is used by the agricultural industry. Apparently it is in great demand at the moment and prices are rocketing. He explained to me that farmers will spend more of their money on fertilisers when they can see a return for this additional expenditure due to a belief that prices for their crops are set to remain high, or even continue to increase in price. The converse is also true that they buy less fertilisers when there is a glut and falling prices for their crops. That would seem to makes sense to me. This applies in particular to grain production.
 
All of this year the Saltydog graphs have been showing wheat prices on an upward trend. This is supported by ETFs for corn, wheat and soybean showing price rises for 2012 of 30% plus, with most of this increase coming in the last three months. If you are considering this area of investment you want to know whether these super returns are likely to continue.
 
Well here are some points that might indicate that these trends could continue in the short term. The new middle classes in the Emerging World have discovered the joys of eating meat and cattle consume a disproportionate amount of corn to produce these calories. The Developed World on the other hand is on an Environmental Rally and using Ethanol instead of gas-oil is high on this agenda. Ethanol plants again consume vast quantities of corn. Finally I come to our highly volatile and unpredictable weather. This year the drought in America (the worlds bread basket) could reduce corn, wheat and soybean crops by a third. So in the near future why would grain prices come down.
 
Looking long term the Worlds agriculture industry will have to cope with the points above and also with an ever increasing world population. This I am sure it will do by bringing into cultivation the vast tracks of uncultivated land in Africa and other continents by new techniques and products that will be developed by the agriculture and Bio-Tech. industries.