Commodities: Why Corn Is Popping

By Elizabeth O'Brien

Quick, name the two best-performing asset classes over the past five years. Gold, you say? That’s right. Most investors are aware of the shiny metal’s ascent. But the other might come as more of a surprise. Here’s a hint: it’s getting to be as high as an elephant’s eye this time of year. Yes: corn and gold are tied for first as the top-performing global asset classes of the past five years, with returns of 144% each, according to a Deutsche Bank report out Thursday. So what’s going on with these strange bedfellows, and is it too late for investors to get in on the action?

The price of corn’s meteoric rise comes down to simple supply and demand. The nation’s farm belt is suffering from a major drought. And while the dry conditions are most acute this year, it’s actually the third year of weather-related crop woes for the United States, an “unprecedented” stretch in modern times, said Sal Gilbertie, president of Teucrium Trading, sponsor of a corn exchange-traded fund (ticker: CORN).

Indeed, “severe or greater drought” is affecting about 75% of corn and soybean production, according to the United States Department of Agriculture. This means corn yields are way down—we’ll know more about the extent of this supply hit on Friday, when the USDA releases its monthly report on agricultural supply and demand estimates. Meanwhile, global demand remains strong for corn for feedstock, ethanol, and other industrial uses, experts said. Barring a global financial crisis that brings down all commodities, “we’re looking for very strong corn prices through next fall,” said Daniel M. O’Brien, Extension Agricultural Economist at Kansas State University.

While corn has a relatively inelastic demand and a variable supply, experts say gold’s a different commodity altogether. All the gold in existence is still around today, and while production out of the mines can vary, it’s really demand alone that drives the yellow metal’s price, said Brian Hicks, co-portfolio of the U.S. Global Investors Global Resources Fund (PSPFX). The financial crisis and resulting bailouts have pumped trillions of dollars into the global economy, fanning fears of inflation down the line. Many investors see gold as an alternate currency that holds its own as the value of paper currency declines. At around $1617 per ounce, gold has retreated from its high of $1900 last September. Yet the metal could resume its climb on a resolution to the ongoing debt crisis in Europe and a strengthening economy here at home, Hicks said. In the meantime, many financial advisers recommend holding three to five percent of your assets in gold as a portfolio diversifier.

And what about the runners up? Silver, fittingly, came in second, with a 122% return over the past five years, while Brent crude oil took the bronze, with 61%.