Corn is an essential commodity with a significant impact on the global economy. It is one of the most widely traded commodities in the world, with a wide range of uses from food and fuel to animal feed. The United States (US) is the world's largest producer, followed closely by Brazil. As with any commodity, the price of corn is subject to change based on various factors, including supply and demand, weather patterns, and global economic conditions.
In this article, we will explore the seasonal patterns of the corn market that influence prices after the planting season into the harvest season, the historical trends and patterns of price fluctuations, and strategies that traders use to profit from these patterns. Whether you are a seasoned trader or a curious observer of the markets, this post will provide valuable insights into the dynamics of the corn market.
Past activity in the corn market
Each year, December corn futures are producers' primary contract months to hedge their new crop. The daily December 2023 chart illustrates the peak in prices in late May of 2022, shortly after the geopolitical event between Ukraine and Russia began. Prices had been in a steady downtrend as Brazil announced both of their corn harvests would be bumper yields, and China was purchasing less corn until the 1st anniversary of the downtrend in May of 2023 when prices rallied. The rally was attributed to a fear of drought conditions in the US that could reduce crop yield for the year.
In a recent article for Barchart, "2023 Bumper Corn Crop?" I commented, "Since the end of February, the commercials have been liquidating their shorts (red vertical lines) and some longs (blue vertical bars.) Resulting in a decline in gross positions as a percentage of the total open interest of corn."
Source: CMEGroup
Producers would prefer higher prices to hedge their new crop. Producers pulled back on their short positions as prices declined to sub $5.00 per bushel. Managed money had built a net short position, and prices were ready to continue falling.
Producers needed higher prices to hedge new crops, and only half as many had hedged for 2023 compared to the same time in 2022. Two events were causing hedging problems:
- 1) Producers would prefer hedging when prices are above $6.00 per bushel
- 2) Prices of futures contracts were in backwardation (near months priced higher than back months), making it difficult to hedge. Cash prices are trading at $6.44, while December futures are trading at $5.88 currently.
Seasonality impacting new crop hedging
The corn market is highly cyclical and is heavily influenced by seasonal patterns. These seasonal patterns and cycles are caused by various factors such as weather, demand, and supply. For example, in the United States, the corn market has a seasonal cycle where prices typically rise in the Spring and Summer months due to planting and growing seasons. During this time, supplies are low, leading to higher prices. Conversely, prices tend to fall in the Fall and Winter months due to the harvest season. Corn growers, processors, and traders must understand these seasonal patterns and cycles to manage their trading and maximize profits effectively. By keeping track of these patterns, traders can make better-informed decisions and use market trends to their advantage. Ultimately, understanding the seasonal patterns and cycles of the corn market is crucial for anyone looking to be successful in this industry.
Source: Moore Research Center, Inc. (MRCI)
MRCI research shows the 15-year average of corn prices throughout the year. The 2023 rally to traditional seasonal highs in June did not develop. When a long-term seasonal pattern fails, the market usually makes a decisive move in the opposite direction.
Why would December corn trend down the first six months of the year during consistent strong seasonal uptrends? Commercial producers are looking ahead to another bumper crop in Brazil, and the US is planting more corn acres than soybean this season with the potential for higher yields this harvest season. China's economy is not coming back online anytime soon, resulting in future excessive corn supply.
I have identified the June months with red dots on this continuous December monthly corn futures chart going back to 2008. The purpose of this chart is to illustrate the high percentage of times that June preceded high prices leading into the Fall harvest season period.
The current price rally has reached prices greater than $6.00 per bushel and in the upper range of all-time highs of $8.47. Both events bring the commercial producer back to the futures market to hedge their new crop by selling futures or using short options strategies.
Traders can learn a lot by understanding commercial trading activity. Commercials think in terms of probabilities, unlike novice speculators who will get caught up in the current news and think corn will cost $10.00 per bushel. Can corn go that high? Of course, trading is a probability business, and looking back to 2008, corn has had every reason to go higher, and it can't for whatever reason.
The Commitment of Traders Report (COT Report)
Source: CMEGroup
The recent COT report reveals how aggressively the producers have been selling into this rally, especially since the price reached the $6.00 handle. As corn was trading sub $5.00 per bushel in May 2023, the producers (red vertical) were decreasing their short positions weekly. At the lows, the COT report shows that only 550K producer shorts (green box on the table) were in place for the 2023 new crop hedging season. Typically at this time, there would be 1 million plus shorts (blue box on the table). As of last week's COT report, the commercial producers have extended their short positions to 739K. Over the previous two weeks, they added 106K new shorts, marking a 3-month high.
In closing
Traders have multiple products to participate in corn market speculation. The standard-size corn futures contract ZC, the mini-corn futures contract XC, Barchart symbol XN, and the Exchange-Traded Fund (ETF) CORN for equity traders.
Another strategy is to pay attention to weather patterns. If there is a drought, for example, the price of corn will likely go up as there is less supply available. July and August are the critical weather months for corn. Similarly, if there is a bumper crop, the price of corn will likely go down as more supply is available. Other factors that can affect the price of corn include government policies and regulations, changes in transportation costs, and shifts in demand from other countries. By paying close attention to these factors and trends, traders can develop strategies to take advantage of seasonal patterns in the corn market.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
