The USDA released its March World Agricultural Supply and Demand Estimates Report on March 8. In a March 13 Barchart article, I highlighted the USDA increased U.S. and worldwide ending inventories compared to February levels, pushing corn prices slightly lower to the $6.16 per bushel level.
On March 13, nearby NYMEX May WTI crude oil and gasoline futures prices settled at $74.91 per barrel, and $2.5809 per gallon wholesale, respectively. Corn is a critical ingredient in many foods, but in the U.S., corn is the primary ingredient in ethanol that blends with gasoline to power motor vehicles.
On April 6, corn, NYMEX crude oil, and NYMEX gasoline futures were higher than the levels on March 13, and the trends have turned from bearish in mid-March to bullish in early April.
Corn recovers
Nearby May CBOT corn futures fell to $6.0675 per bushel on March 10.
The chart highlights corn’s pattern of higher lows and higher highs since the March 10 low. Corn futures for nearby delivery traded to a $6.6850 high on April 3 and were above the $6.45 level on April 6.
Crude oil and gasoline prices move higher after OPEC’s surprise production cut
On April 6, OPEC+ shocked the crude oil market by cutting production by over one million barrels per day. Last year, the U.S. Biden administration battled the highest petroleum prices since 2008 by selling an unprecedented amount of the U.S. Strategic Petroleum Reserve, which fell to 371.6 million barrels as of the week ending on March 31, 2023. The SPR is at the lowest level since December 1983.
Meanwhile, the sales and low reserve level mean that the U.S. could be out of bullets to suppress crude oil prices after OPEC’s latest move to curb output. Crude oil prices spiked higher after the cartel’s latest move.
The chart illustrates that after reaching a $64.36 low on the May contract and $64.12 per barrel on the continuous NYMEX futures contract, the price exploded higher after the production cut, reaching an $81.81 per barrel high on April 4.
The U.S. administration had said it would buy crude oil to replace the SPR sales when the price fell below the $70 per barrel level, but the latest data shows the administration may have missed its chance when crude found a bottom at under $65.
The NYMEX gasoline futures chart shows the decline to a $2.0204 per gallon wholesale low in December 2022 as gasoline was at the beginning of the offseason for demand. The rise in crude oil pushed gasoline futures over the $2.80 per gallon level in early April, just as the market moves into the peak driving season during the spring and summer.
Ethanol follows corn and gasoline on the upside
The U.S. ethanol mandate requires refiners to blend ethanol with gasoline to power motor vehicles. Since the U.S. is the world’s leading corn producer and exporter, corn is the primary ingredient in U.S. ethanol production, making the coarse grain highly sensitive to crude oil and gasoline prices.
The Chicago ethanol swaps chart illustrates the rise of biofuel’s price from 80.5 cents in April 2020 when crude oil plunged below zero, and gasoline fell to its lowest level this century. Ethanol exploded to $3.45 per gallon wholesale in November 2021. Ethanol prices remain at a multi-year high at the $2.4350 level on April 6.
The beginning of the 2023 crop year- Supply uncertainties for many reasons
As the seeds go into the ground in April 2023, corn prices at over $6.45 per bushel are the highest in years.
The twenty-year corn chart shows the last time corn was above $6 per bushel in April before 2021 was in 2013.
The weather across the fertile growing regions worldwide is always the most significant factor for the path of least resistance of corn and all agricultural products each year. However, the war in Ukraine makes the 2023 crop year atypical.
Source: atlasbig.com
The war in Europe’s breadbasket puts more pressure on the U.S. to produce a bumper 2023 corn crop, as Ukraine is the world’s fifth leading corn producer and Russia is the tenth. Ukraine and Russia are battlefields, and the critical logistical hub at the Black Sea ports remains a war zone. The ongoing war threatens global corn and other agricultural supplies.
Meanwhile, Russia has used other commodity exports as economic weapons against “unfriendly” countries supporting Ukraine. Russia is a leading exporter, pushing prices higher and making availabilities scarce. Fertilizers are critical farming inputs. Moreover, rising inflation and fuel prices have increased production costs, and market prices must keep pace to make farming economical.
Aside from the fickle weather, many other factors are pushing corn and agricultural commodity prices higher as the northern hemisphere moves into the 2023 crop year.
CORN is the ETF product that tracks the CBOT corn futures
At around $24.79 per share, the Teucrium Corn ETF product (CORN) had over $114.1 million in assets under management. CORN trades an average of 57,058 shares daily and charges a 0.25% management fee.
CORN owns a portfolio of CBOT corn futures contracts to minimize roll risks.
May corn futures rose from $6.0675 on March 10 to $6.6850 on April 3, a 10.2% increase.
The CORN ETF reached a $24.25 low on March 13 and rose to a $25.64 high on April 3, a 5.7% rise. CORN tends to underperform the nearby futures on the upside because the current futures month attracts the most speculative activity and highest volatility. The portfolio of three contracts tends to lower the price variance of the CORN ETF, with the benefit of avoiding extreme volatility during contract roll periods.
Corn prices will remain highly sensitive to oil and gasoline prices because of corn’s role in ethanol production. With so many issues facing the corn market at the start of the 2023 U.S. crop year, buying on price weakness could be the optimal approach to the coarse grain futures and the CORN ETF product.
On the date of publication, Andrew Hecht 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.
