Managed money began liquidating their record short positions in mid-July. Prices declined until late August when a potential seasonal low was $3.85. Producers of unpriced stored carry-over corn have patiently waited for this speculative short-covering rally to sell into. Could producers get a more substantial rally than expected and hedge at significantly higher prices?
What could that catalyst be?
Source: Barchart.com
The daily December corn chart illustrates the price action (red line) of the 2024 crop planting to harvest season. The low price of $3.85 was made in August, and prices have since rallied (green line). The rally from the August lows began as managed money began unwinding their record 508K short contracts (red bars) in mid-July.
Source: CMEGroup Exchange
The price of corn (yellow line) drifted lower shortly after the peak, but each succeeding week, managed money continued liquidating their short positions by buying back their contracts. The amount of buying required to cover these short positions was enough to cause prices to stop declining and begin the current rally.
Managed money had 508K short positions, a record, in mid-July, and as of the last Commitment of Traders (COT) report on September 24, they had repurchased 182K contracts.
During the period of record short positions, the number of managed money traders who held long positions (blue bars) was only 152K contracts. Since that time, they have added 56K new long positions. The funds buying back contracts to cover their positions and those purchasing new long positions have supported this price rally in corn from the August lows.
The following COT report will detail how the corn producers reacted to this recent rally in corn.
Source: CMEGroup Exchange
The price of corn (yellow line) has been rising since August. As the price has increased, the producers have been selling (red bars) each week into the price rally. In a recent article for Barchart, " Holding Corn? Ready to Sell at Higher Prices?" I wrote, " Last year's bumper crop created a significant carry-over that many farmers still store on their farms and have yet to price. "
Managed money trades with trend strategies (follows price) while commercial traders sell into rallies and buy into price declines to build hedging positions. The COT report for managed money reveals how the uptrend is attracting a more bullish posture. If managed money keeps adding to their long positions, they could ultimately be net long (more long positions than short), and a stronger uptrend could be pursued, allowing producers to continue selling at even higher prices.
Seasonality
Through extensive research, Moore Research Center, Inc. (MRCI) has found that corn prices historically have bottomed in late September into mid-October. When markets put in a seasonal low before the historical seasonal lows, it often indicates the move up will be stronger and longer than usual. Time will tell if this year's early seasonal low holds to this pattern.
MRCI research has refined an optimal window for when corn prices may be more likely to rally off seasonal lows.
Source: MRCI
Refining seasonal windows allows traders to take positions with higher probabilities of success. Another feature an MRCI seasonal window offers is that the historical drawdowns were historically lower and a better opportunity for a higher return on investment. After all, who wants to sit through a tremendous drawdown before the seasonal move occurs or while in the trade?
MRCI has found that the March corn futures contract has closed higher on approximately October 23 than on September 30 for 13 of the past 15 years (87%) of the time. During this time, the average profit was $1,054, and the average loss was $350. Another interesting fact is that three of the 15 years never had a daily closing drawdown.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
Source: MRCI
Managed money is aware of these seasonal patterns, which may explain the unwinding of their historical short position. They are now transitioning to a more bullish posture. If this transition continues, producers will be delighted to sell into the price rally.
In closing….
As the market moves forward, the transition of managed money from a record short position to a more bullish stance is a crucial development. Producers patiently waiting for better pricing opportunities may benefit from this shift if the current rally continues. Seasonal patterns suggest that corn prices tend to bottom around late September to mid-October, and this year's earlier low could signal a more substantial, longer-lasting move upwards. If managed money continues adding to their long positions, this rally could present a prime opportunity for producers to hedge their crops at more favorable prices.
However, it's crucial to remember that while historical patterns provide valuable insights, they should not be solely relied upon for decision-making. Traders must balance these seasonal trends with other fundamental and technical factors, such as market sentiment and supply conditions, to make informed choices. With harvest season approaching, the potential for volatility remains, and traders should stay vigilant about risk management while positioning themselves for potential gains.
Futures traders could use the standard-size corn contract ZC or the mini-contract XN, and equity traders could use the exchange-traded fund (ETF) CORN to participate in this seasonal setup.
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.