Corn prices are correcting the uptrend from the $3.85 level after reaching $4.34 for the December futures contract. The recent United States Department of Agriculture (USDA) crop production and World Agricultural Supply Demand Estimate (WASDE) report weigh heavily on the market. Producers have been waiting for a price rally to sell much of their on-farm corn from last year. With this year's harvest nearly 50% completed and carryover estimated to be 1.81 million bushels, storage has become a problem, resulting in corn being brought to market.
Was the recent corn price rally in solid hands?
Source: Barchart
Unfortunately, the recent price rally in corn never attracted managed money traders. Managed money traders are typically trend followers, and due to their position sizes, they can push prices up or down for long durations. Reviewing the following Commitment of Traders (COT) reports will reveal who was doing the majority of the buying in corn. These reports are released each Friday and reflect positions as of the recent Tuesday close.
Source: CMEGroup Exchange
The price of corn (yellow line) rallied in mid-August to $4.34 from the $3.85 low. During this time, managed money (blue bars) did not increase to show aggressive buying by the managed money traders. After holding a record number of short positions in the recent bear market, they continued liquidating their short positions. When prices rise while positions are being unwound, this is typically called a short-covering rally, and it doesn't provide much support when prices reverse back down.
Perhaps managed money traders' research had already informed them that the recent USDA report would be bearish for corn prices. The following chart estimates this harvest period's all-time highs of bushels per acre.
Source: USDA
The following report will look at swap dealers. Barchart defines swap dealers as "an entity that deals primarily in swaps for a commodity and uses the futures markets to manage or hedge the risk associated with those swap transactions. The swap dealer's counterparties may be speculative traders, like hedge funds, or traditional commercial clients managing risk arising from their dealings in the physical commodity.
Source: CME Group Exchange
The yellow line represents the price of corn. The difference between the managed money and swap dealers' COT report is that the long positions (blue bars) increased each week as corn rallied. Looking at the price of corn on the left side of the chart, prices declined, and swap dealers stayed with long corn positions as they were hedging and not speculating.
As the rally continued, corn producers, many of whom still had unpriced corn on their farms, sold futures contracts as prices rose.
Source: CME Group
Corn prices (yellow line) rallied for multiple weeks, and each saw aggressive producer selling (red bars). The recent USDA report stated that the average Farm Price ($/bu) for the 2023/2024 season was $4.65, which may explain the exuberance of producer selling when prices retested that price area.
Corn Prices Stumble: Is the Rally Over or Just Getting Started?
In an article for Barchart written in early spring, "Corn Prices – Sub $3.25 Before $6.00 Per Bushel? I stated, "The corn market has had an interesting trading pattern since 1974. Reviewing the continuous monthly futures chart, we can see the floor and ceiling prices from 1974 to 2000 (green box.) This is significant because of the pattern of each time prices rallied to the ceiling prices near, at, or beyond all-time highs (red arrows), and the subsequent price direction was down to the floor prices (green arrows). As prices increase, corn producers are incentivized to plant more corn to exploit the high prices, thereby oversupplying the market. The price has to drop to levels (floor prices) to entice buyers to bid for corn aggressively.
The above-mentioned ceiling and floor prices remained at that level until 2007 when prices traded outside the range. In May 2008, prices topped off, and a new ceiling area was created (blue box). Multiple times, the corn market approached this new ceiling (red arrows), and each time, the price was rejected and returned to the floor area (green arrows). From 2008 to 2024, this pattern has held.
With the large volume of unpriced corn on farms, it was no surprise that the aggressive producer sold into price rallies. Managed money and producers are both aware of how close prices are to a significant floor price in corn that has existed since 2008.
One thought regarding future price activity is that prices can stay there for multiple months or even a couple of years when prices get to these floors. With the overwhelming supply still on farms and the new supply arriving after the harvest, price rallies will be met with aggressive producer selling for some time. Managed money may begin building new long positions if they feel an uptrend has developed.
Another idea, the recent price decline, was an early wave of hedging. The aggressive hedging may subside when the current harvest is over 50% complete. Producers will better understand how much more hedging will be needed for the 2023/2024 harvest.
Speculators buying at these levels for long-term investments will be getting in on prices below production cost. Historically, this has been a long-term bullish time to buy.
Seasonal Pattern
While the longer-term bullish pattern of trading at floor prices exists, there is a shorter-term seasonal sell pattern, perhaps pushing prices lower to even more bargain prices for speculators.
Source: Moore Research Center, Inc. (MRCI)
MRCI research has found that the March corn contract traditionally has another leg down to test the recent lows to the left on the chart. With the floor prices nearby, new lows may be limited to the downside.
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.
MRCI research finds that the March futures contract closed lower on approximately November 24 than on October 31 for 14 of the past 15 years (93% success rate). As a reminder, these are not optimal dates. The moves can start as early as two weeks before or after the optimized entry date, allowing traders to apply their own strategy and risk management rules to participate.
Source: MRCI
Another fact about this seasonal sell setup is that during the past 15 years, the pattern had three years of no closing daily drawdowns.
In closing…..
The market faces a critical juncture as corn prices continue to correct from their recent uptrend. The latest USDA crop production report and WASDE data indicate a bearish outlook. With nearly 50% of the harvest already in, storage pressures have led producers to sell their unpriced corn aggressively. The recent price rally lacked strong support from managed money traders, who were unwinding their short positions instead of buying. This suggests the rally was more of a short-covering event than a sustained upward trend. As prices retreat, it's clear that corn faces significant headwinds, with managed money staying cautious and producers eager to sell at any hint of a rally.
Corn's price movements will be closely tied to harvest completion and storage dynamics. As the season progresses, the heavy selling pressure may ease, and speculators could see this as an opportunity to enter the market at prices below production cost—historically, a bullish signal. However, traders should be cautious. The seasonal sell pattern, identified by Moore Research Center Inc., suggests that prices may dip even further before finding a stronger floor. Balancing technical indicators, fundamental analysis, and prudent risk management will be vital in navigating these market conditions.
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.
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.
