6 Stocks to Play China's Yen for Corn

07/18/2011 12:30 pm EST


George Wolff

Author, The Biotech Investor's Bible

Corn prices have been all over the map in recent months, but their recent downtrend is a great place to buy into the huge growth in Chinese corn demand, writes George Wolff of Global Profits Alert.

Who cares about corn? I have never traded a commodity in my life. And I’m sure I’ll never be one of those shrieking guys waving their hands wildly down in the commodities pit in Chicago.

But I do think the latest news on corn is big news for investors.

Until very recently, corn prices were diving. That’s bad enough for farmers, but the effects ripple out to the wider economy.

Corn is America’s biggest crop by far, valued at more than $66 billion last year. That money funnels out into industries like farm machinery, fertilizer, seeds, and pesticides, to name just a few.

With billions at stake, a lot of companies are indirectly tied to corn prices. Prices for corn dropped more than 15% after he Senate voted to end tax breaks for the ethanol industry. (The House hasn’t voted yet, but the $6 billion subsidy for American corn-based ethanol seems doomed in these hard fiscal times.)

But all is not lost for the many industries which make their billions from the corn crop. First of all, the federal mandate requiring the use of ethanol in fuel is not ending. That means demand won’t be affected greatly.

But China is the biggest new demand factor. And the latest report from China was explosive.

Hungry China Goes Voracious
Half a million tons. That’s how much corn the US expected China to buy this year...all year. That’s why the latest order from Beijing turned the market upside down.

In a single week, China ordered a stunning 540,000 tons of the grain. One week!

What’s more, it looks like China’s appetite has not been satisfied. As China watchers know, inflation there hit a peak last month, beating expectations at a dizzying 6.4%.

Most consumer price inflation comes from food, especially pork. Prices for China’s favorite meat ballooned by 57% in June, according to Shanghai Daily. That’s a huge problem for hundreds of millions of Chinese consumers.

Now Beijing is scrambling to buy feed grain while it is cheap.

The Wall Street Journal published this bold prediction: the Chinese “are on the cusp, we believe, of needing a whole lot more corn than they can produce,” said David C. Nelson, a global strategist and investment banker to many of the world’s biggest food concerns.

The Journal predicts that another “flurry” of orders from China is coming. In fact, booming Chinese demand could reshape the entire US agricultural industry.

As China has grown wealthier, the nation’s immense middle class has indulged its hearty appetite for meat. That means the country needs a lot more corn to feed a lot more hogs—about 20% more last year.

Soybean oil for frying favorite dishes is also a sizzling growth industry. China imports fully one quarter of the US's second-largest crop, soybeans, which are a $39 billion industry here. And that’s not counting all of the associated industries that process and transport this uniquely versatile product.

Soybean futures are rising right along with the price of corn contracts. So what do investors do if they are not commodity traders?

As I mentioned, a lot of companies take part in this industrial complex. One of the biggest is Bunge (BG), a truly global agribusiness operation that has its hands in every part of the food chain.

Better known is Archer Daniels Midland (ADM), which is involved in procuring, transporting, storing, processing, and merchandising commodities including corn and soybeans. Another giant in the field, Cargill, is privately held.

Among the companies that supply equipment to corn and soybean producers are Deere (DE) and Caterpillar (CAT). Caterpillar is best known for its heavy construction equipment sold worldwide, including China. But the company also produces agricultural machinery. Deere is best known for its farm equipment.

Among fertilizer producers, consider Potash of Saskatchewan (POT) and The Mosaic Company (MOS). Both gained heavily as the news about China’s unexpected grain demand was released.

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