Agricultural Markets Ripe for Speculative Picking

Most people probably don’t realize (I didn’t) that the U.S. has a strategic grain reserve. Well had. It’s almost entirely depleted. The United States Department of Agriculture (USDA) operates the Commodity Credit Corporation (CCC) which, according to the USDA site, performs the following functions:

“The Commodity Credit Corporation (CCC) is a Government-owned and operated entity that was created to stabilize, support, and protect farm income and prices. CCC also helps maintain balanced and adequate supplies of agricultural commodities and aids in their orderly distribution.”

Some may recall that in the 90’s there was a big push to get the country off various forms of welfare including farming subsidies. A 1996 farm bill nixed government grain reserves and Farmer Owned Reserves (FOR), the latter of which was intended to geographically spread out the country’s grain reserves to protect against something unforeseen happening to the stockpiles. The reserves are just now running out.

Now that decision is looking to have been a very bad one indeed with this year’s corn crop caught in a perfect storm. One-hundred-year storms flooding the Midwest combined with an 8% reduction in acreage dedicated to corn will amount to a 10% hit on this year’s harvest. Then, too, there’s the rising demand from the ethanol distillers. In 2006, they used 20% of the corn crop, 27% in 2007, and the expectation is that ethanol will absorb somewhere around 40% of the 2008 crop. Though at $7 a bushel of corn, ethanol producers are losing money at today’s pump prices. Yet, since ethanol burns less efficiently than gasoline and requires special equipment, there’s little room to jack up the pump price without killing the market.

Corn is having a serious ripple effect out into the other grain markets and feed for livestock without putting much of a dent in the energy market. That’s got speculators and the hedge funds looking beyond the usual agricultural companies for ways to get in on the action.

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