When it comes to the financial markets, corn is everywhere. You can invest in corn directly through derivatives and corn-related exchange traded funds (ETFs), or indirectly through agriculture-related equities like Deere & Company (NYSE:DE) or Mosaic Company (NYSE:MOS).

The present and future value of corn plays a role in your investments as well as your wallet. At the grocery store, prices are on the rise. Food prices could soar as much as 3 to 4% this year due to the drought.

Investors and consumers have the drought on their minds, but that's only one of the factors that will affect corn prices this year.

SEE: 5 Grocery Items Affected By The Rising Price Of Corn

Ethanol Is Key
Another key factor to consider is ethanol.

In an average year, growers divert one-third of the nation's corn crop from food to ethanol production. Last year, the drought that affected 65% of farmland in the continental United States reduced corn yields. Because of that, nearly half the corn crop went to ethanol production.

The lower supply has created a battle among ethanol producers that rely on the quotas to stay in business, meat producers that are finding it more expensive to raise livestock and food manufacturers who are feeling a margin squeeze.

Enter the EPA
Whether you believe that a significant portion of the smaller corn harvest should be diverted to ethanol, the U.S. Environmental Protection Agency's (EPA) 2005 Renewable Fuel Standard says it should. Created as part of the Energy Policy Act, this law calls for an increase in the amount of fuel derived from renewable sources, including corn.

Because of last summer's drought, many have called for a waiver of the federal ethanol mandate, which would result in lower demand for corn, lower corn prices and, therefore, lower food prices.

So far, the EPA has said no.

In a statement on its website, the agency asserted that its "extensive analysis makes clear that congressional requirements for a waiver have not been met."

Another Tough Year Coming?
The U.S. Department of Agriculture, in its annual Crop Production and Grain Stocks Reports, indicated lower corn stocks than previously expected. In addition, Blackstone Advisory Partners vice chairman Byron Wien predicted that climate change would contribute to widespread crop failures in 2013.

Coupled with concerns on the part of some about a corn seed shortfall for the coming planting season, will the EPA reconsider?

Michael E. Kraft, professor emeritus of political science and public and environmental affairs at the University of Wisconsin-Green Bay, in a Jan. 10 opinion-editorial in the Kansas City Star, called for Congress to rewrite the renewable fuel mandate in a way that discourages the use of corn to make ethanol.

SEE: Commodities: Corn

2013 May Surprise the Market
A number of other factors suggest the possibility of an abundant corn crop in 2013. Farmers in South America and the Ukraine plan to plant more acres. U.S. farmers alone will plant 99 million acres of corn in 2013, the highest acreage since the 1930s, according to Informa Economics.

A Jan. 10 report by the U.S. Grains Council indicates that, for the first time in history, China will produce more corn than rough rice. This is the result of growing affluence in the Chinese middle class and a desire for a more protein-rich diet.

Citing the results of the USDA reports, Teucrium Funds analyst Sal Gilbertie said he believes those results indicate that demand is strong, even in the face of higher prices.

SEE: 4 Rising Food Costs That Will Hurt Your Wallet

The Bottom Line
Farmers will be hoping for that often-elusive combination of good weather and high demand to drive up the value of corn when the 2013 planting season gets underway.

Meanwhile, since those yellow kernels are so inextricably woven into the fabric of both the financial and consumer marketplaces, keeping an eye on the price of corn makes sense for investors and shoppers alike.

Related Articles
  1. Markets

    Debunking Biofuels: Do They Really Raise Food Prices?

    Learn about the two sides of the argument on the effect biofuels have on food prices and about other factors that affect food prices.
  2. Stock Analysis

    Who Are Exxon’s Main Competitors? (RDS.A, XOM)

    Learn about some of the main competitors to Exxon Mobil in the energy sector, and find out how their businesses are different from that of Exxon.
  3. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  4. Stock Analysis

    Glencore Vs. Noble Group

    Read about the differences between Glencore and Noble Group, two companies in the commodities business. Learn about accounting accusations facing Noble Group.
  5. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  6. Investing Basics

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
  7. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  8. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
  9. Chart Advisor

    These 3 ETFs Suggest Commodities Are Headed Lower (COMT,CCX,DBC)

    The charts of these three exchange traded funds suggest that commodities are stuck in a downtrend and it doesn't look like it will reverse any time soon.
  10. Fundamental Analysis

    The Changing Economics of the Oil Business

    Read about the changing economics of the oil business. Discover how oil companies are using technology to increase the efficiency of old wells.
RELATED FAQS
  1. How does scarcity affect global agriculture stocks?

    Agricultural products are a commodity and their prices are related to other commodities, particularly crude oil. Crops including ... Read Full Answer >>
  2. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  3. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  4. What countries are driving most of the growth of the food and beverage sector?

    The countries driving most of the growth of the food and beverage sector are the primary emerging market economies of China ... Read Full Answer >>
  5. What other precious metals are there beyond gold and silver?

    Besides gold and silver, the other precious metals are platinum, palladium, ruthenium, rhodium, osmium, rhenium, germanium, ... Read Full Answer >>
  6. What countries have the largest gold reserves?

    The United States holds the largest stockpile of gold reserves in the world by a considerable margin. In fact, the U.S. government ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center