The continued drought in the US, the worst in over fifty years, has severely affected the corn and soybean production this year, resulting in prices skyrocketing to an all-time high. The US is the biggest producer of corn with the market valued at US$76.5 billion in 2011, followed by soybeans at US$35.8 billion and wheat at US$14.4 billion. A poor harvest means prices will rise and stockpiles will be further depleted. The drought has impacted the Midwest, which is the key growing area, and the US Department of Agriculture has indicated that half of the nation's corn crop was rated poor to very poor.

The outlook remains grim as the severe drought conditions continue to show signs of worsening. The Department of Agriculture has slashed its forecast for corn production indicating that output would only reach 10.8 billion bushels for 2012-13, down 13 per cent from a year ago, and slashed its national corn yield estimate to 123.4 bushels per acre, the lowest average yield since 1995-96. Soybean production has also been affected, albeit to a lesser extent, but the impact will be felt just

the same.

It is therefore expected that there would be less corn coming onto the global markets over the next year because of a sharp drop in US exports. Dominating the market as the largest producer of corn, this will have a far- reaching effect which threatens a recurrence of the 2008 global food crisis. However, the full effects of the American drought will likely take several months to emerge. Its severity will be determined by a number of additional risk factors. Global grain stocks have reached a new low, with the US and other countries depleting their reserves. Unfortunately, there is going to be little room to manoeuvre for countries forced to import grains,

say experts.

The impact of the corn shortage is far-reaching as companies that produce ethanol-a by-product of corn, have already started to feel the fallout. This is a direct result of corn prices being above US$8 a bushel and the very low demand for the biofuel. Output of ethanol from producers has fallen to the lowest levels seen since October 2009 and two of the largest producers of ethanol, which trade on the New York Stock Exchange (NYSE), Archer Daniels Midland and Valero Energy, have both reported poor earnings recently. The main reasons cited are low inventories of corn and weak fuel demand. This has resulted in both companies shutting down some of their ethanol producing plants.

Many organisations, including the United Nations, have been lobbying the US to waive government mandates for ethanol usage this year. The mandates ensure that more than 13 billion gallons of ethanol will be used this year, irrespective of the price of corn. The US livestock and poultry industry is also asking the government for a suspension. Animal feed is the second biggest user of corn, behind ethanol. It accounts for about a third of corn usage, so the two industries are in competition for scarce, high-priced corn. The call is now on for the government to halt ethanol production for its biofuel programme, which uses 40 per cent of corn output, and instead allows more of the crop to be used for food and livestock feed.

The livestock and poultry industry will suffer with falling profit margins because of the soaring price of corn for animal feed. Meat and chicken prices are set to increase as announced by meat producer Smithfield Foods and chicken producer Sanderson Farms, as corn makes up the greater portion of their raw material. Sanderson Farms has been the worst affected as evidenced in their stock price, which has tumbled over 34 per cent in the last two months.

The current reduced output of corn coupled with the overall deterioration in the quality of the crop sets the stage for corn to potentially continue to appreciate in price. For investors who wish to trade this commodity, the recommendation would be to invest in exchange traded funds (ETFs), such as the Teucrium Corn Fund. This fund has gained more than 40 per cent since June 2012. An ETF will allow you to gain exposure to corn, and various other commodities, without actually taking on the risk of owning the commodity.

Patrick Robins is a Wealth Advisor at Stocks and Securities Limited and can be contacted via probins@sslinvest.com