Corn market participants have seen a steep fall after prices peaked in the Spring of 2022. Last year's planting season rally saw prices peak at $6.30 based on the new crop December 2023 futures. Many farmers/producers held onto their crops, anticipating higher prices. However, record production in the US and Brazil led to an oversupply, causing prices to plummet. Consequently, US corn storage on farms soared to a 16% increase over the prior year and hit an all-time high. Farmers now face storage costs amid higher interest rates while hoping for a price rebound, but with prices just above $4 per bushel and the break-even point slightly above $5.00, selling will need to be done on price rallies.
Are new 2024 December futures contract lows ahead?
Source: Barchart
The price downtrend following the 2024 planting season rally is persistently continuing. Last Friday's USDA report was generally bullish for corn, but it was aggressively sold as prices declined to the trend lows. The contract low for the December 2024 futures contract was created in 2020 at $3.95. As of this writing, the lowest price for this seasonal downtrend since May has been $4.03.
Will the funds press the corn market to new contract lows?
Source: Drought.gov
The recent drought map as of July 09 shows the US corn belt, Nebraska to Ohio, and good moisture levels for the recently planted corn as it enters its pollination period. There is no evidence of flooding or too much rain to cause problems. Looking at Iowa, the largest corn producer, where in 2023 they produced 16% of the nation's corn, is looking great for this time of the year.
Commitment of Traders (COT) report
Source: CMEGroup Exchange
The recent COT report reveals the producers' significant selling pattern (red bars) as prices (yellow line) rallied to the May/June highs. Notice how, as prices turned down from the initial price peak in May, there was a minor price rally, and the sellers became aggressive. Producers will need more of these minor rallies to hedge the old crop they are storing.
Source: CMEGroup Exchange
The COT report for the managed money traders dates back to 2006. Their net position (yellow line) in the corn market is short. They are holding a record number of short positions. For more clarity on the COT report, I wrote an article for Barchart, "A Commitment Of Traders Report With More Transparency."
Source: CMEGroup Exchange
The COT report for the Processors for the same 2006 lookback point shows they are at record net long positions (yellow line). This reflects that corn processors have been aggressively buying while producers wait for a rally to sell.
When managed money traders are at record levels of short positions like this, many think a market could reverse to the upside due to the imbalance of longs and shorts. And typically, they would be correct.
Observe the table below the graph. We can see that the producer's short positions are currently at 467K contracts, compared to 620 K contracts at the same time last year. This confirms that a significant amount of farm-stored corn must soon be priced (hedged).
Due to this need to price (hedge) their old crop, future price rallies will be met with selling. The producers will sell, and the managed money will add to their profitable short positions, leaving the buying to commercial processors and swap dealers.
Source: CMEGroup Exchange.
Swap dealers have been net long corn since 2006 and continue to buy for their hedged accounts. Their trading size allows them to absorb a significant amount of the selling by producers and managed money. Their buying will provide the liquidity to allow the shorts to press prices much lower. All trends come to an end, but for now, corn appears to have much lower prices to come.
Seasonal Pattern
An upcoming seasonal sell pattern may add more supply to this already burdened market. Seasonal patterns do not necessarily cause a market to move up and down by themselves. Still, if a dominant trend and fundamentals support the seasonal pattern, then prices are more inclined to repeat their historical patterns.
Source: Moore Research Center, Inc. (MRCI)
MRCI research has found a seasonal sell pattern (blue line) that may deserve a trader's attention. The seasonal window (yellow box) for selling the corn market has a historical record of closing lower on about August 07 than on approximately July 19 for 12 of the past 15 years, with an 80% effective pattern.
Corn may appear highly oversold, but it can still go lower. If you need an example of how prices can go higher or lower than many anticipate, look at the US stock market and how many people have tried to pick a top because it seemed high. Corn has two of the most significant market participants, producers and managed money, needing and wanting to sell more corn contracts.
Source: MRCI
Due to the producer's yearly needs to hedge their corn prices, this seasonal pattern has a decent track record. Notice that four of the 15 years had no daily closing drawdown.
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.
In closing…..
Corn market participants have faced a significant price decline since peaking in the spring of 2022 at $6.30 per bushel based on December 2023 futures. Many farmers, anticipating higher prices, stored their crops, but record production in the US and Brazil led to an oversupply, causing prices to drop to just above $4 per bushel. With storage costs rising amid higher interest rates, farmers are under pressure to sell, yet current prices are below the break-even point of slightly above $5.00. Despite a bullish USDA report, the market continues its downtrend, nearing the December 2024 futures contract low of $3.95. The latest COT report shows managed money traders holding record short positions while processors hold significant long positions. This imbalance suggests a potential for a market reversal, but the current trend indicates continued lower prices. Seasonal patterns, supported by dominant trends and fundamentals, anticipate further price declines, as historical data shows a tendency for lower prices by early August. Traders are advised to consider a range of technical and fundamental indicators alongside seasonal patterns for informed trading decisions.
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.
