Why Corn Prices Are About to Fall... And How to Profit
By Tom Dyson
July 9, 2008

A friend of mine owns a farm in Iowa. He first invited me to visit in November 2006. At the time, I was interested in grains. Corn was trading at $3.30 a bushel... and soybeans were at $6.50 per bushel. I knew they had to rise.

My friend grew corn and soybeans on his farm. He explained to me how corn and soybean prices hadn't gone anywhere for 10 years... And many of his neighbors and the locals in the town had long since given up on making any money growing crops.

He took me to see an ethanol plant a few miles from his farm. We stood and watched a bulldozer raking a huge pile of corn. Every few minutes, another semi would pull up and deliver another trailer load of corn.

This ethanol plant had just popped up. The year before, the government had banned MTBE – a poisonous chemical – from gasoline. Refiners had used MTBE in gasoline to prevent engine knocking. Ethanol also prevents engine knocking. So oil refiners started adding ethanol to gasoline instead.

Then George Bush signed the Energy Policy Act of 2005. This new law required refiners to mix 4 billion gallons of ethanol into the gasoline supply in 2006... and 7.5 billion gallons by 2012. Energy security was the reason. Oil prices spiked in 2005 when Hurricane Katrina struck New Orleans. President Bush wanted to develop a new source of energy to protect America from future supply disruptions. He chose corn ethanol.

But the U.S. didn't have enough ethanol. So in the first months of 2006, the ethanol price jumped, and dozens of new ethanol plants materialized to profit from the increase.

When I saw how much corn this ethanol plant was consuming and how many ethanol plants were under construction, I knew a major bull market was about to kick off in the grain markets.

Today, corn is at $7.20, and soybeans are at $16.20.

The sudden high grain prices are causing major shifts in the commodity markets. I wrote about hogs in my last column. Hog farmers can't afford to feed their pigs. They're selling their pigs for whatever money they can get for them. Piglets go on the farm dump.

Hog farmers aren't the only ones hurt by these high grain prices. Expensive corn kills ethanol plants, too. I heard from my friend in Iowa recently. He told me there's a rumor moving around the Midwest farming communities: 16 ethanol plants are about to go bankrupt. He says it will release 500 million bushels of corn onto the market.

A $20 Million Pile of Gold... in Iowa The Largest Freezer in the World

The corn story is all over the media. There's no one left to buy. And my friend says the corn on his farm is so green and healthy, it makes his "eyes hurt." If all this corn floods the market at one time, the price of corn will plummet.

I'm not going to make any short bets on corn. The corn market is rising in a parabola, and there's no telling how high it could go. But I am going to switch my attention to other sectors of the agriculture market. Like meat. Agriculture will be in a bull market for many years to come. There's going to be a shortage of meat. Hogs and cattle are my favorite plays right now.

Good investing,

Tom

AS PREDICTED, THE COCKROACHES HAVE ARRIVED

The cockroaches are starting to cover the floor.

Back in November, we ran a chart of the iShares Financial ETF (IYF). This basket of Wall Street banks was down from its peak around $120 a share to $100. A few cockroaches had crawled out of the mortgage mess and into mainstream headlines. I forecasted more would crawl out of the heap before it was all done.

Today's chart confirms that forecast. This fund is loaded with the likes of Lehman Brothers, Citigroup, American Express, and all those on the hook for thousands upon thousands of silly loans. The cockroaches have arrived, and IYF's chart resembles the last second of a javelin toss.