Equity traders often overlook seasonality (market cycles). Commodity traders are well aware of the significance that seasonal patterns play. Here is an opportunity for equity traders to capitalize on a seasonal pattern in the corn market that has helped to create an astonishing 130% 5-year return for this company. As a bonus, this company pays a dividend.
Buy in October and Come Back After Memorial Day
A famous equity market axiom is "Sell in May and Come Back After Labor Day." For this article, we will twist this around and say, "Buy in October and Come Back After Memorial Day."
Commercial entities produce commodity products. Numerous commodity products are produced, but for this upcoming opportunity, we will study the corn market's seasonality.
Source: Moore Research Center, Inc. (MRCI)
The United States (US) is the world's largest producer of corn. Like clockwork, corn is planted in the spring and harvested in the fall each year. The previous chart is research from MRCI showing the times when the price has been at a seasonal low and high (black line) during the past 15 years.
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.
Corn historically reaches its seasonal high late in May to mid-June. As corn has been used for livestock feed, exports, and ethanol production, prices have rallied as the supply has been depleted throughout winter. As the planting season ends, commercial producers aggressively sell futures contracts to hedge their newly planted crops against a price decline created by the anticipation of an excessive supply of corn arriving in the fall.
Corn historically makes its seasonal low price in late October as the harvest season ends. Supply is at its peak, and prices are generally lower than during the spring planting season. At this time, the corn producers can unwind their hedges from the spring by buying back their short futures positions to offset the lower price they will get when they sell their grain to an elevator due to the excessive supply.
Futures traders typically use these seasonal patterns to identify periods during the year when a product may be making seasonal highs or lows. This gives traders an edge and increases the probability of the trade.
Traders can use the standard-size futures contract (ZC) or the mini-size (XN). Equity traders can trade the exchange-traded fund (ETF) named CORN.
How Does This Translate Into an Opportunity For an Equity Trader?
Futures traders will trade the corn contract and capitalize on the price movement of that product. Equity traders looking for a dividend and avoiding the financial risk of trading a physical commodity like corn would look for a stock with the same edge as the corn market.
We discussed the spring planting season and how prices of corn historically were at their seasonal high. But, if the planting season occurs each year in the spring, a trader should be asking, what is being planted that will also result in a consistent pattern of higher prices? Did you say corn seed? Exactly!
If the corn producers are planting every spring, they will require the seed to be planted, leading us to the question of which publicly traded company sells the most corn seed in the US.
Corteva, Inc. (CTVA) provides agriculture products. The company develops and supplies corn, soybean, and sunflower seed markets. It also supplies products to the agricultural input industry that protect against weeds, insects, other pests, and diseases and enhance crop health. Corteva, Inc. is based in Indianapolis, IN. For nearly 100 years, Corteva Agriscience has worked with farmers worldwide to provide seed products and management recommendations to make farmers more sustainable and productive. Increasing yield potential, protecting against diseases, pests, and weeds, and developing new food, feed, and fuel solutions will benefit farmers and consumers.
Corn seed accounts for 68% of Corteva's seed sales, while soybeans account for 20%. Corteva and Bayer are the two largest seed companies in the United States, and together, they control over half of the corn, soybean, and cotton seed markets.
Source: United States Department of Agriculture (USDA)
CTVA is part of the S&P 500. The 52-week high is $61.21, and the 52-week low is $43.22. The average daily volume is approximately 2.8 million shares. Another interesting fact is that 81.54% of the shares are institutionally owned.
Source: Barchart
The daily CTVA shows the seasonal window from October to June for higher prices (green boxes). During this time, producers plan and purchase for their upcoming planting season needs. Hence, more demand for corn seed from CTVA seasonally increases their share price. During 2022 (red box), the seasonal pattern failed.
From the current price to the end of October, will CTVA rally into the spring planting season?
CTVA continues to grow and is currently in solid institutional hands. Institutions know the correlation between corn planting and the seeds needed to plant.
In closing..
Incorporating seasonality into an equity trading strategy can offer significant opportunities for those willing to look beyond traditional stock market cycles. When paired with companies like CTVA that provide essential agricultural products, the seasonal pattern in the corn market can present a unique edge for equity traders. By leveraging the historical patterns of corn planting and harvesting, traders may find a consistent window for buying and holding CTVA shares from October through Memorial Day, which aligns with increased demand for corn seed as farmers prepare for the spring planting season.
While the seasonality pattern offers a compelling opportunity, traders should remain mindful of the broader market conditions and risk management practices. With its institutional support and consistent dividends, CTVA's positioning as a significant player in the corn seed market makes it an attractive option for equity traders seeking growth potential and stability. By incorporating this seasonal insight into a diversified strategy, traders may capitalize on this niche opportunity, enhancing their portfolio with a company positioned to benefit from the agricultural cycle.
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.
