FWIW:
Corn Faces Bullish And Bearish Factors
Jul. 9, 2018 6:30 AM ET|3 comments | About: Teucrium Corn ETF (CORN)
Andrew Hecht
Commodities, long/short equity, medium-term horizon, long-term horizon
MARKETPLACEHecht Commodity Report
(15,402 followers)
Summary
Corn has declined to the lowest price since 2017.
Tariffs weigh on all grains.
Energy is supportive.
Demographics point higher.
The weather will be the final arbiter for the price.
This idea was discussed in more depth with members of my private investing community, Hecht Commodity Report.
The trade issues facing the United States and its trading partners around the world have hit the grain markets harder than most other raw materials. While the other commodities in the crosshairs of the protectionist measures have experienced increased price volatility, the United States is the world’s leading producer and exporter of soybeans and corn. Therefore, retaliatory measures by China and other trading partners around the world have hit the U.S. right in the corn and bean belt. For farmers, the price action has amounted to a below the belt blow in a match that has not yet played out to a conclusion.
At a time of the year where uncertainty about the weather and size of the 2018 crop over the coming two months that are the heart of the growing season should be keeping prices stable, they have plunged. When it comes to the trade issue, China and other U.S. trading partners have decided to hit back striking at the heartland of the country with a long history as an agricultural nation. Despite tariffs, there are bullish and bearish factors present in the corn futures market these days. The most bearish factor has been trade and the resulting price action that has gripped corn futures since late May.
Corn had declined to the lowest price since 2017
While soybeans fell to the lowest level in a decade, the reaction in the corn market has been less dramatic.
Click link below for chart/tables
Source: CQG
As the weekly chart highlights, the price of nearby corn futures on the CBOT dropped to lows of $3.37 per bushel at the start of July which is the lowest price since December 2017 when they traded to a previous low at $3.3525. At just over $3.50 on the nearby futures contract on July 6, price momentum on the weekly chart displays a bearish trend that is falling towards oversold territory. A rally on Friday caused the daily chart to cross higher in oversold territory, while the monthly momentum crossed to the downside in neutral territory as a result of the selling in June. The long-term quarterly chart has not yet crossed lower, but and further selling could turn the long-term pictorial to the downside.
The price of corn has experience selling pressure at a time of the year when the 2018 crop is still not a sure thing. It will be the weather over the coming weeks that determines the final crop yield this year, but trade issues have trumped the weather and sent the price of corn to the lowest level of 2018. In a sell the rumor and buy the fact reaction to tariffs which took effect on Friday, the price of corn rallied on the final session of last week.
Tariffs weigh on all grains
While tariffs have weighed on the price of corn, it caused the price of soybeans to plunge.
Click link below for chart/tables
Source: CQG
Corn may be trading at the lowest price in almost seven months, but beans are at a decade low. As the monthly chart of nearby CBOT soybean futures demonstrates, the oilseed fell to a low of $8.34 per bushel over recent sessions which is the lowest price since December 2008 when it found a bottom at $7.77625. The December 2008 low is the current level of technical support for beans as the tariffs went into effect on China on July 6. China purchased one-quarter of the annual U.S. crop of the oilseed, so the trade issue and retaliation have weighed heavily on the price of bean futures. The U.S. is the world’s leading producer and exporter of both soybeans and corn, but the beans do not have support from another demand vertical that underpins the price of corn these days. Like corn, soybeans rallied significantly on Friday, the day that the tariffs took effect.
Energy is supportive
In the United States, corn is the primary ingredient in the production of ethanol. The ethanol mandate requires a blend of the corn-based biofuel and oil-based gasoline. The booming economy in the U.S., despite the current trade issues, has caused oil and gasoline prices to rise throughout 2018.
Click link below for chart/tables
Source: CQG
As the weekly chart of NYMEX gasoline futures shows, the fuel has been in a bull market making higher lows and higher highs since early February 2016. The most recent peak in the price of gasoline came at the end of May when the price reached $2.2855 per gallon wholesale. However, after a correction took the price of the fuel to a low that was just below $2 per gallon, gasoline recovered and was trading at just under the $2.1100 level at the end of last week.
Higher gasoline prices tend to support the price of ethanol. However, over past years, an oversupply of corn countered the impact of gasoline prices and the price of the biofuel has been stable.
Click link below for chart/tables
Source: CQG
As the weekly chart of ethanol futures shows, the range from early 2016 has been from lows of $1.251 to highs of $1.76 per gallon. At the $1.436 level at the end of last week on the nearby futures contract. At around seven cents below the midpoint of the trading range, the price of ethanol remains weak compared to gasoline, but it continues to provide demand for corn.
Click link below for chart/tables
Source: CQG
The premium of gasoline over ethanol prices has grown from a discount for gasoline when oil hit lows of $26.05 per barrel and gasoline prices were briefly under the 90 cents per gallon level in early 2016 to a premium of over 67 cents per gallon these days. While ethanol prices are at their lowest level versus gasoline since way back in 2014, the biofuel continues to provide a steady stream of demand for the corn market and keep prices from following soybeans lower into the bearish abyss over trade.
Demographics point higher
Trade issues aside, demographics continue to be supportive of all agricultural commodities. In Q2 the world added another 19-plus million mouths to feed. At the turn of this century, there were approximately six billion inhabitants of the planet and today that number stands at 7.484 billion. Each day, more people, with more financial resources, are competing for limited food and fuel resources which is a consistently rising demand factor for commodities like corn.
Click link below for chart/tables
Source: CQG
As the annual chart of corn prices dating back to 1968 shows, the price of the grain has been making higher lows over the period. Moreover, during times when drought caused a decline in output of the grain, the price has moved to higher highs. The last drought hit the corn market in 2012 and took the price to a record level at $8.4375 per bushel. During that year, soybean futures moved to just shy of $18 per bushel. Both grains are significantly below half those lofty levels these days, but both have seen demographic factors increase their lows over past decades.
In the world of agricultural commodities, demand factors like demographics tend to have a long-term impact on prices. However, short-term issues that weigh on demand or supplies can cause price shocks to the up or downside. Trade issues that could cause demand for U.S. corn (and beans) to drop over coming months have sent prices to lows. However, the supply side of the fundamental equation, which tends to be the most explosive at times, is still a matter of conjecture for the 2018 crop year.
The weather will be the final arbiter for the price
It is the beginning of July and corn crops are growing across the fertile plains of the United States. This year, because of high soybean prices before the planting season, farmers planted more beans than corn. Additionally, the USDA in their mon their monthly WASDE reports told markets that acreage for crops was lower this year than last.
Time will tell if the weather over the coming weeks will support crop production or drought conditions will limit output during the harvest season in the fall. However, less corn planting and fewer acres allocated to the grain promise that after five consecutive years of bumper crops in the U.S., 2018 may not be the sixth. There is still a lot of the 2018 growing season left, and despite trade issues, a weather event that limits crop yields this year could turn the recent implosive price action explosive.
The overriding sentiment in the corn market this year is bearish given the devastating potential impact of tariffs and retaliation on demand. However, the world requires food which transcends the political issues surrounding trade. Any shortage of corn could propel the price higher at a time when it is trading at the lowest level of the year, and energy prices are providing consistent support.
The most direct route for an investment or trade on the long side in the corn market is via the futures and options on futures offered by the CBOT division of the Chicago Mercantile Exchange. For those who do not venture into the highly leveraged and volatile world of futures, the CORN ETF product has net assets of over $73 million and trades over 100,000 shares on an average trading session. CORN holds three CBOT corn futures contracts and does an excellent job reflecting the price action in the futures market for the grain.
Corn is facing bullish and bearish factors these days. Energy prices and rising global demand for food are supportive, while trade has been weighing on the price of the grain. At the lowest price of the year, and with all of the negative news associated with tariffs and retaliation weighing on the price of corn, the grain is close to its lowest price of the year. It is possible that the next surprise in the corn market comes on the upside since the bearish news is on the front pages of the news cycle while the supportive factors continue to limit the downside potential for the price of corn.
The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. More than 120 subscribers are deriving real value from the Hecht Commodity Report.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.
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