As most stock indices were bringing a welcome end to their losing streaks on Thursday, at least one risky asset class was heading sharply lower. Corn futures sank after the U.S. Agriculture Department announced it's expecting a record U.S. corn crop this fall. That sent prices sharply lower as investors anticipated an end to a prolonged period of incredibly tight supplies.
That dip represents a nice buying opportunity for an asset that I believe has tremendous upside potential, especially in the current environment. The biggest reason to be bullish on corn futures comes from -- no surprise here -- China. Prices spiked in recent weeks as rumors of a massive China purchase swirled -- rumors that turned out to be false. But, while China hasn't made any big single purchases, it continues to tap into U.S. markets to help replenish its stocks. The country is increasing its purchases of U.S. corn, and it figures to continue doing so for the foreseeable future.
China's hunger for corn and other agricultural commodities is not a blip on the radar or a one-time phenomenon. Much like other emerging markets, China is home to a rapidly expanding middle class. Rising incomes and discretionary budgets in the developing world translate into a growing demand for better nutrition. In China, moreover, the government is going to do all it can to ensure that its population is content and well-fed. In a one-party system, there is additional incentive to make sure basic needs are met -- it's the most efficient way to avoid protests that could potentially threaten control.
There are, of course, major hurdles to be cleared between now and the realization of a bumper crop. The government's prediction for a huge haul this autumn could be derailed by extreme weather over the next several months, a scenario that has played out many times in the past. Betting on the weather obviously isn't a sound investment strategy, but identifying potential risks that the rest of the market is overlooking can be a way to spot opportunities.
Corn is cheap right now, in part because investors are assuming a best-case scenario for the fall harvest and are not fully pricing in the potential for Chinese demand, whether in the short term or in the long run. That makes for an interesting opportunity.
The only way to play corn through the exchange-traded structure is through Teucrium Corn Fund (CORN), which spreads its holdings across three separate maturities. For investors who want a low-maintenance way to play this key agricultural commodity, CORN makes a lot of sense. Because holdings aren't concentrated in front-month contracts, the impact of return-eating contango is lessened considerably for those looking to hold for an extended period (e.g., through the fall harvest).
After its slide Thursday trading, CORN is now down about 15% on the year. Given the big slide and all the factors that have the potential to push prices higher in coming months, it's worth taking a chance on this ETF for investors with a bit of risk tolerance.