Corn market set for rebound

Corn prices are down over 50% from their June 2007 peak of 7.65, but the current dip in corn prices is just a temporary decrease, as higher demand and a potentially smaller-than-estimated total crop are poised to push corn prices higher.
Carryover stocks currently are at decade lows after the Midwest (mainly Iowa and Illinois) experienced the worst floods in 15 years this past July. Floods erode current supply leading to high prices as seen in the summer of 2008. Floods also will have an affect on the 2009 total supply, with the carryover stocks having less cushion. Carryover stocks from the previous year become the current year’s beginning stocks and augment current production in determining supply. I see this effect having a positive affect on the price of corn in respect to the Winter/Spring seasonal trend. As farmer-owned grain has been sold and used domestically or abroad, and farmers begin to dig into carryover inventories, prices tend to rise. Investors advise to take short-term positions at this point in the market as tops in the market tend to occur around February and March. And with carryover stock inventory at drastic lows, the seasonal trend should magnify the price affect.
Another possibility for corns price pop comes from speculation that hot, dry weather will reduce production in Argentina and Brazil, the two biggest exporters of the crops after the U.S. Argentina’s corn harvest may drop as much as 40 percent to 12.5 million metric tons compared with 20.85 million last year, and Argentina’s corn harvest may drop as much as 40 percent to 12.5 million metric tons compared with 20.85 million last year.
On the Demand side of the equation, I see President Obama’s stimulus package having a positive affect on corn prices. He has stated that the plan will have a large focus on infrastructure to create more jobs for an economy currently with 7.2% unemployment. Corn starch plays a major role in infrastructure. Corn starch is used in the paper industry for coating paper, and the construction industry for wallboard construction. I understand that stimulus plans generally have a lagging affect on our economy, but I feel that the futures markets will be first affected as a leading indicator of this increase in the demand for corn.
Another factor of demand is the use of ethanol (produced from corn) as an alternative resource to gasoline. This USDA raised its expected total of corn to be used to make the alternative fuel ethanol in 2009 by 150 million bushels. 33% of corn production is expected to be used for ethanol, which is a 23% increase from last year. Finally, in its favor, legislation from the U.S. energy bill signed by Former President George W. Bush on December 20 requires biofuels to increase to 36 billion gallons in 2022 from 7.5 billion in 2012.
Finally, during times of recession, people substitute heavily into vices, and I see the increased demand for vodka (grain alcohol) having a positive affect on the price of corn.
To invest on these corn fundamentals, the futures market is a great place to seek the highest returns. However, if your capital and risk do not match up to this type of investment, the DBA (PowerShares commodity ETF) is a great way to play the corn boom. The DBA has 63% of its asset holdings in the corn futures market.

Corn Spot Price (close 2/12): 369.25