After a brutal price sell-off to start the new year, the corn market appears to have bottomed in March 2024. During this time, managed money traders held their most significant short position since a record short in 2019. Commercial traders hold a smaller short position than a year ago, perhaps related to a breakeven price near $5.25 for some areas of the country. Seasonally, corn usually begins to rally until June or July, when prices have peaked for the growing season.
What's ahead for this year's corn rally?
Brazil
US corn traders typically monitor the Brazillian corn crop during the year's first quarter.
The first crop can begin harvesting in February, and the second crop, the most significant production, can start in June. By May of each year, US traders have a reasonable estimate of the corn crop in the world's second-largest corn producer region. After the information is known, traders can focus on the US corn planting season.
Interest Rates and Corn
In March 2022, the Federal Reserve aggressively raised the Federal Funds Rate 11 times, resulting in a 525 basis point increase, ultimately affecting consumer and business borrowing costs. Since July 2023, the rate has remained at this level.
Businesses cannot borrow at the Fed Funds rate and, like consumers, are forced to borrow at a higher rate to keep their businesses running. Many corn producers are paying 8% and higher on business loans, compared to about 3.5% before the Federal Reserve began raising rates. Corn producers face cost factors such as corn seeds, fertilizer, nitrogen if planting corn back to back, fuel for equipment, labor salaries, and pesticides after crops mature, just a few items needed for a profitable crop year.
Purdue University recently posted the 2024 breakeven estimates for some regions of the corn-growing area to be near $5.25 per bushel. With December futures trading at $4.83 per bushel, farmers are reluctant to sell corn at these levels, and most have been spending their time getting the fields and equipment ready for the planting season.
Technicals
Source: Barchart
The daily December 2024 corn chart shows the price decline from January 2024 for new crop corn. The downtrend ended near early March 2024. From there, prices rallied until mid-March, when a broadening price pattern was in effect until last week when corn appeared to have broken out of the pattern. Much of this buying has been short covering by managed money as they unwind near record short positions.
The May-July corn spread chart narrowed from -14.5 cents to -7.5 cents during April. This reflects a tighter supply and higher demand for corn. While farmers had no incentive to sell and cash demand increased, the corn price rally was supported.
Short covering speculator positions, a narrowing front-month spread, and the high breakeven price supported higher corn prices in the near term.
But will this rally continue?
The Disaggregated Commitment of Traders (COT) Report
Source: CMEGroup Exchange
Supporting the statement that producers have little incentive to sell, the COT report, as of April 2024, shows that their current short positions (red bars) are 418K contracts. Compared to last year, they began accumulating short positions at nearly 500K and continued selling into the seasonal high until owning 646K contracts. The price of corn (yellow line) peaked last year in late June as the commercials completed their short corn hedges for the season.
Seasonality
Source: Moore Research Center, Inc. (MRCI)
MRCI research reveals that after April, the 5-year seasonal pattern in corn makes a minor price rally before it begins a sideways trading pattern. During May, the price gathers momentum to the upside until it peaks in June or July. After this period, the corn market anticipates heavy supply during harvest, and price drops create a reliable seasonal pattern.
The carry-over from the previous crop year was excessive and may result in a smaller pre-summer price rally than usual. As producers see prices rallying to levels where they can hedge their new crop and retain a profit, we could see more aggressive commercial selling into rallies. Keep an eye on the COT report that is released each Friday.
In closing…
As the corn market rebounds from a rocky start to the year, signs point to a potential rally ahead. Managed money traders have begun to cover their short positions, signaling a shift in sentiment. Factors such as the Brazilian corn crop and interest rates remain critical influencers, with eyes on Purdue University's breakeven estimates and the Federal Reserve's rate decisions. Fundamentals suggest a tightening supply and increasing demand, supporting higher prices in the near term.
However, the outlook beyond the coming months is uncertain, as seasonal patterns suggest a price peak by June or July. With producers hesitant to sell at current levels and the potential for increased commercial selling into rallies, close monitoring of COT reports will be essential in trading 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.
