Wednesday, November 4, 2009

The Debts of the Spenders: Is Warren Buffet a Corn Trader?

Is Warren Buffet betting on corn? The billionaire investor with a famously long term view caught the public eye this week by disclosing his holding company, Berkshire Hathaway, had recently acquired a large stake in American railway company, Burlington Northern Sante Fe (BNI). BNI runs a profitable freight line conveying containers full of stuff from coast to coast. One such route includes crossing the bread basket of America, the Great Plains, where acres of corn and wheat are grown and harvested every year.

Please note that Buffet is not betting on the price of corn. Instead, he is betting on the VOLUME of production increasing w/in the next few years. This does not necessarily mean prices will fall. Factors such as weather, pests, and spoilage will continue to add elements of uncertainty to the trade.

Some background: Harvest season is nearly over. Seasonally, most grains - including corn - are going to lie fallow until late winter's sowing. Speculative activity will begin to pick up in early December and again in late February as traders focus on March deliveries and the potential for new crop planting. Yearly highs are typically achieved in late May/early June.

Because of last year's commodity bubble, adding 2008-2009 's sharply higher prices will raise the average price range. Indeed, charting the past 10 years (1999-2009) will show a divergence from longer range charts like the 30 year.

To add further uncertainty into the mix, overplanting of soybeans within the past year has led to talk among some farmers of switching over to corn production while their soy fields lie fallow.

Through BNSF, Buffett Going With The Grain, Specifically Corn

Berkshire Hathaway’s $34 billion purchase of the Burlington Northern Santa Fe Corp. (BNI), billed as a wager on the economic future of the U.S., could also be a bet on the continued expansion of the corn industry, especially into the Great Plains.

Berkshire Chief Executive Warren Buffett called Monday’s purchase an “allin wager” on the economic future of the country, raising hopes among the grain industry for better railway conditions.

“It’s recognition of the large amount of capital investment that has gone into this [railroad] industry over the past 10 years—both in terms of upgrading track—and computerization,” said Bill Nelson of Doane Agricultural Services. “The story behind the purchase is that investment is
in position to start returning a lot of dollars to investors ... certainly grain export is one of the major elements involved there.”

Grain transported to export terminals in the Pacific Northwest, Gulf of Mexico, Mexico and the Great Lakes comprises approximately half of all the agricultural commodities that BNSF hauls annually. BNSF is the nation’s leading rail corridor for corn, the country’s largest single crop.
“This is a great year for Berkshire Hathaway to be investing into railroad transportation,” said Joe Victor of Allendale Inc. “With a record corn/soybean crop coming in, it should be a great year to move grain, very much like late 2006/early 2007,” before the U.S. economy began to falter.

BNSF is already the nation’s largest rail carrier of agricultural products, transporting more than one million carloads of farm commodities in 2007, nearly half of which were corn and wheat.
With some 20 billion bushels of all types produced annually, grain is engrained into the U.S. economy, and accordingly, so is grain transportation. The U.S. Department of Agriculture estimates that railroads originate approximately 35% of all domestic grain shipments each year.

“As for grains in particular, if we don’t fix the locks/dams of the major river arteries of the U.S., then railroads are going to be more important to shipping grain,” said Mike Zuzolo of Global Commodity Analytics & Consulting LLC. With almost all of BNSF’s 32,000 route-miles of track lying west of the Mississippi River, observers say Buffett’s big buy—the largest ever made by his
Omaha investment firm—is also a vote of confidence for continued expansion of corn into the Great Plains, a landscape that for generations had been dominated by unending miles of spring and winter wheat.

Buffett is “betting on future of cash grain industry in Great Plains, because a large percentage of grain grown here moves to the coast by rail,” said Nelson, of Doane Agricultural Services. “Yields are improving, so grain volumes are. Look at where these crops have migrated and where the investment money has gone: into the Plains and into corn.”

A USDA map now classifies counties as far west as the Nebraska-Wyoming border as “major production areas” for corn, a crop once primarily grown east of the Missouri River. Victor attributes the westward march of corn to improved genetics resulting from the development of new biotech hybrids—a technology that has not yet been adopted in the wheat industry.
“Wheat is 10 years behind on biotech,” he said. “The big picture is more corn acres, and fewer wheat acres, in the U.S.” The USDA concurs, publishing baseline forecasts in February that predicted “a gradual shift to corn, and away from other crops,” through 2018, partially due to
“gains in exports that keep corn demand and producer returns strong.”

Corn yields almost four times as many bushels of grain per acre as wheat, naturally resulting in far greater demand for transportation.

Source CME News For Tomorrow
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