- Both the intermediate-term and long-term trends of the corn futures market have turned up since the end of August.
- Meanwhile, corn futures spreads remain neutral-to-bullish.
- Will this be enough to push Watson to move from a net-short futures position to a net-long futures position?
As we approach the midpoint of September (2024), the question I’m most often asked is if corn is a “Buy”. In late August I wrote a piece talking about how the December 2024 corn futures contract (ZCZ24) found itself in position to complete a bullish technical reversal pattern on its long-term continuous monthly (Dec corn only) chart. All it needed was a higher monthly close to complete the pattern, with Dec24 finishing July at $3.9775. As August unfolded, Dec24 initially posted a new low for its major (long-term) downtrend of $3.85, below the contract’s synthetic floor[i] of $3.96, before uncovering enough buying interest to close the month at $4.01. This was important for a couple reasons:
- First, as mentioned, it was above the July settlement meaning Dec24 had completed its bullish reversal pattern, ending the major downtrend that began at the end of May 2022 when the December 2022 contract closed at $7.1150.
- Second, Dec24 was able to close August above the big round number of $4.00. Based on the corn’s characteristic Round Number Reliance, this opened the door to a test of $4.10 and beyond. As of Friday (September 13) morning, Dec24 had posted a monthly high of $4.16, it’s sight now set on $4.20.
With any discussion of a market’s change in long-term trend, and if that market is a “Buy” from an investment point of view (as opposed to hedgers), we need to keep in mind a couple of my Market Rules, starting with #1: Don’t get crossways with the trend. This doesn’t mean we have to study all the complicated intricacies of technical analysis, but rather understand the simple concept of price direction over time. Why? Because if we apply Newton’s First Law of Motion to markets we have: A trending market will stay in that trend until acted upon by an outside force”, with that outside force usually[ii] noncommercial (fund, investment, Watson[iii], etc.) activity.
If we boil all this down it tells us funds set the trend of the market, and since global investors have more money than most of us can even imagine it’s best to stay in step with noncommercial traders until we see a reversal pattern. When that happens, it indicates the flow of Watson’s money could start going the other direction. Then we have to acknowledge our proclivity toward the CCR Reality[iv], thinking what we see out our back door is the same thing everyone else should see. It’s not, or at least it doesn’t have to be. What matters is Watson has changed its activity and it’s better for smaller investors to jump on board rather than stand on the tracks in front of the train.
What does Watson think of corn mid-September? A look at the Barchart Opinion page shows an overall average of an 8% Buy. That’s not an overpoweringly strong number, but it is a “Buy” nonetheless. My old-school analysis gives a similar result with the long-term monthly chart and intermediate-term weekly charts showing uptrends. Why isn’t my “Buy” stronger then?
Newsom’s Rule #6 tells us, “Fundamentals win in the end”, and corn’s REAL fundamentals are not bullish. At Thursday’s close the Dec24-March25 futures spread, our read on the commercial side’s opinion on 2024 crop production, covered 58% calculated full commercial carry (cfcc), still below the bearish threshold at 67% meaning the view of supply and demand was still neutral. It’s interesting to note that this spread added 20 percentage points from the end of March (37%) to the end of August (57%) but has not crossed the bearish threshold ahead of the 2024 harvest.
However, the May-July futures spread finished August at 28%, below the bullish threshold of 33% meaning the longer-term commercial outlook sees a tightening supply and demand situation. What would cause this? Keep in mind the May-July is our read on the commercial view of Brazil’s next crop (both corn and soybeans), and as discussed by the panel at the recent Barchart Grain Merchandising and Technology Conference, long-term forecasts are calling for La Nina across Brazil this growing season. Generally, this means less than ideal conditions including hot and dry. If so, it could bring more global demand to the US later in the 2024-2025 marketing year.
From a structural point of view, then, we can summarize corn as a Type 8 or 9 (8.5?) market. What do I mean by this? If we whittle our analysis down to only trend (flow of noncommercial money) and futures spreads (commercial view for different time frames) and the three possibilities of bullish, bearish, or neutral, we have 9 potential market types. Of these, Type 1 (both bearish) is the most bearish while Type 9 (both bullish) is most bullish. Type 8 is when funds have turned bullish while the commercial side remains neutral. With the 2024 corn market again between Type 8 and 9, investment traders could be long call options (also considering the market’s low implied volatility) or moving to long futures.
What then is the answer to the initial question: Is the corn market a “Buy”? From an investment point of view the answer would seem to be “yes”. The previous time corn moved from a major downtrend to uptrend was at the end of June 2020 when the Dec22 issue closed at $3.5050. The time before that was the much-discussed change in direction as October 2014 ended. We’ll see if Watson actually sees this as an opportunity to move from a net-short futures position (last reported at 90,500 contracts) to a net-long futures position.
[i] December corn’s synthetic floor is based on the 85% level of the US government insurance spring base price. This year (2024), that price was $4.66 (the average daily closing price of Dec24 futures during February 2024) putting the 85% level at $3.96.
[ii] Note the use of the Vodka Vacuity that tells us there are no Absoluts in markets.
[iii] My name for the algorithm-driven investment industry in general.
[iv] Named for the Credence Clearwater Revival classic, “Lookin’ Out My Back Door”.
More Grain News from Barchart
- Wheat Rally Leading the Grain Bull Charge on Friday Morning
- Corn Rallying to Start Friday
- Soybeans Extending Pop into Friday AM Trade
- Wheat Closes Mixed, With Spring Wheat Pulling Out Gains
