Corn prices appeared to have finally found a bottom from the summer sell-off. Speculators were short the market in record numbers until late August, when they began buying back contracts, convincing some that the harvest seasonal low may be in. Then, exports increased in the last few weeks, and prices rallied more. While the bearish fundamentals of 1.9 billion carry-out and the massive amount of unpriced corn still linger, there isn’t much hope for a significant price rally yet.
Recent Corn Rally Artificially Propped Up – What’s Next?
Just like high prices are the cure for high prices, so goes for low prices is the cure for low prices. When prices reach all-time highs, demand diminishes, and supply builds, resulting in lower prices. As prices sold off from the 2024 springtime highs, the weather conditions were perfect for corn production, leading to 1.9 billion bushels of carry-out to oversupply the market.
Reuters reported in early 2024, “U.S. Department of Agriculture estimates suggest 2023-24 global corn ending stocks will rise 7% on the year, but U.S. stocks are set for a 60% surge. That is the most lopsided, U.S.-heavy growth since 2004-05, when U.S. corn supplies exploded by 120% and global ones rose a more modest 25%.
The difference between this oversupply season and the past was that prices were falling from all-time highs. It’s not unusual for prices to trade at all-time highs and then fall back to meaningful floor prices or production costs.
Source: Barchart
The above chart illustrates how prices trade to all-time highs and then return to floor or production costs.
What drives corn prices after the harvest season?
There are three primary sources of supply depletion after the harvest season: livestock feed, ethanol, and exports. These three items continue into the spring season, resulting in corn prices rising as the supply is depleted. There will be no replenishment until the following harvest season. Part of the recent rally in corn prices has been due to the rise in export and ethanol demand.
During the past month, ethanol has increased by 6.17%, while gasoline has only increased by 1.31%. Typically, ethanol prices rally when gas prices are higher; this is not the case now. Could ethanol be due for a pullback soon?
Exports for corn have been on the rise for several weeks as well. The United States Department of Agriculture (USDA) has reported these increases and plans for five other sales, leading producers to think that prices will continue to increase during this new wave of export sales. The USDA has shown Mexico to be the significant buyer these past few weeks. Compared to China, Mexico purchases smaller amounts, and China has been absent from measurable corn purchases lately. Data also shows that Mexico has been one of the largest importers of US corn over the past few years.
But why has Mexico become so aggressive at buying US corn? President Trump will be looking for support from the Mexican government to end this dangerous border issue we have been faced with the last four years. He has been known to use trade between countries to make foreign countries use some common sense when being asked to help our country. Some suggest that Mexico is increasing its corn purchases in case of disagreements between the two countries.
Source: Barchart
The monthly chart of corn shows the extended duration that corn can trade for when prices finally do return to floor or production costs. Market tops are usually made very quickly compared to bottoms. With the excessive carry-out this year, excessive amounts of unpriced corn still on farms, ethanol not having a solid reason for rallying so much, and exports being vulnerable when Mexico quits its early Christmas shopping for corn, a retest of the recent August price lows and then some sideways trading is not out of the question for the corn market.
The Commitment of Traders (COT) Report
Source: CMEGroup Exchange
The disaggregated COT report shows the managed money traders' interest in the corn market. As the prices (yellow line) fell from the January highs, managed money traders held a record number of short positions (red bars). Today, the market rally from the August lows has attracted some interest in the trend following managed money traders (blue bars), but their bullishness is muted. For corn to have a sustainable uptrend, the managed money traders must aggressively buy more positions.
Source: CMEGroup Exchange
The producer/processor (commercial traders) positions tell a strong story of what they think prices will do soon. Their short position (red bars) is their largest in two years. Interestingly, they are this short at the $4.25 area (close to floor prices) compared to the last time they held this many short positions when the prices (yellow line) were trading near the $7.00 mark.
The December futures contract has always been the largest hedging contract month. However, that contract is priced lower than the March contract (contango market) and may entice some to roll over their short hedge positions to allow more time for a rally to hedge higher.
Source: Barchart
The daily corn chart has the December (blue bars) and the March (black bars) overlayed on the chart. Notice the December contract rally from the August lows was for almost 13%, while the March contract was a little more than 12%. As traders unwound their short positions (buying back) in the December contract, prices went higher than in the March contract, where new short positions were being established into the rally. Also, the relative strength of the rally should be noted using the trendlines. The March contract was weaker than December during the recent rally.
Reviewing the amount of unpriced corn still on farms, some farmers may need to sell their corn in the cash market at these lower prices to raise capital for typical year-end expenditures like taxes, seeds for planting, new equipment or repairs of older ones, and other items they face at the end of each year.
Seasonality
Source: Moore Research Center, Inc. (MRCI)
MRCI research has found that corn prices over the past 15 years (black line) typically put in a seasonal low for the March contract near October. This year, export sales and ethanol demand were better than expected, and corn prices increased until mid-November. Historically, we can see that corn prices decline into December when they put in their final seasonal low before a post-harvest rally begins in earnest. For this season, I will watch the price action after retesting the August lows and then decide whether to trade the long side.
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.
Assets to participate in the corn market
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.
In closing…..
As we analyze the current state of the corn market, it's evident that recent price movements may indicate a sustainable rally later. The market's response to increased ethanol demand and export activity, particularly from Mexico, has temporarily supported prices. However, with ethanol prices rising disproportionately compared to gasoline and Mexico's purchases potentially front-loaded, these factors need more strength to sustain a long-term uptrend. Furthermore, the looming overhang of a 1.9-billion-bushel carry-out and significant unpriced corn on farms weighs heavily on market sentiment. Seasonal trends, as highlighted by historical data, suggest that prices often decline into December, hitting a final low before any meaningful post-harvest rally begins. This seasonal dynamic and ongoing bearish fundamentals indicate that traders should cautiously approach the recent rally.
Critical structural changes must occur for corn prices to establish a lasting upward trajectory, such as more robust managed money interest. The Commitment of Traders (COT) report underscores the subdued interest from speculative buyers and highlights the aggressive short positions of commercial traders at current price levels. Coupled with the pressure on farmers to liquidate unpriced corn for year-end financial obligations, the market faces significant resistance to further price appreciation. Traders would be prudent to monitor retests of August lows and adopt a disciplined approach, combining seasonal patterns with a thorough assessment of their technical and fundamental signals. In this context, it’s crucial to recognize that while opportunities exist, the path to sustained higher prices for corn may still be some time away.
