Is Corn a Good Buy or Goodbye?
Back in July, I talked about how the December corn issue still had some bearish seasonal tendencies to work through. However, the patterns tend to change course in late August leading to a solid rally through early November.
It’s interesting how this tends to coincide with the calculation of the U.S. government insurance harvest price during the month of October. This price is derived by averaging daily settlements for the December corn futures contract (and November soybeans), with the theoretical insurance payment equal to the spring base price (established using the same process back in February) minus the fall harvest price.
Am I implying some sort of conspiracy with government insurance prices? Of course not. That would be absurd, right?
But I digress. Starting in late July, we saw the December 2024 corn futures contract testing the synthetic floor price of $3.96, created by multiplying the spring base price of $4.66 by 85%, before completing a bullish technical reversal pattern at the end of August. This told us a couple things:
December 2024 corn had moved into its seasonal intermediate-term uptrend lasting through the end of November with an average gain between 3% (10-year index) and 5% (five-year index).
The bullish technical reversal pattern on the long-term continuous monthly chart (December futures only) ended the downtrend that had been in place since the end of May 2022 (the December 2022 issue priced at $7.1150), putting the market in a new long-term uptrend.
When I presented this analysis at a growers meeting for a local corn processing plant, it was met with hopeful skepticism. One attendee asked the question on everyone’s mind, “With all the corn that is supposedly in on-farm storage still to come to town, combined with newly harvested bushels, do you really think the market can rally?”
I acknowledged that the idea seems preposterous, but then I brought up the first premise of technical analysis: Market action discounts everything. (I talked about this in my August Farmers Hot Line column.)
In other words, anything and everything that can influence price (fundamentally, politically, weather, etc.) has been factored into the market, meaning all we have to do is study market action. If we accept this premise, then the bullish long-term technical pattern at the end of August tells us the corn market, both commercial and noncommercial, are looking ahead and seeing higher prices over time.
Does the idea of a long-term uptrend in the corn market make sense from a structural point of view? (Recall the structure of a market takes into account two sides: Commercial and Noncommercial. Commercial interests are those involved in the underlying cash commodity. Noncommercial interests are investment traders, funds, speculations, aka Watson.)
As I talked about last time, one of the ways of reading the commercial outlook for a market is by tracking its futures spreads (price differences between futures contracts). In the corn market, the view is generally neutral with the exception being the May-July spread.
What Does This Tell Us?
The commercial side believes there will be enough U.S. corn to meet demand (both domestic and global) through the last quarter of 2024 and first quarter of 2025, with doubts creeping in during the Q2 2025. Why? There has been a great deal of talk about La Nina in Brazil, a situation that tends to bring less than ideal growing conditions. As of Thursday, Sept. 12, China had only 13,400 metric tons (0.5 million bushels) of U.S. corn on the books. If weather reduces Brazilian production potential over time, this could certainly change.
Watson has taken note of this as well, to a certain degree. After holding a net-short futures position of 240,000 contracts in early July the noncommercial side had trimmed that position to 48,000 contracts through early September. However, through late September, funds had shown little interest in moving to a net-long futures position. Why does this matter?
Why Does This Matter?
Recall what Newsom’s market rule No. 1 tells us: Don’t get crossways with the trend, because if we apply Newton’s first law of motion to markets (a trending market will stay in that trend until acted upon by an outside force, with that outside force usually noncommercial activity) we understand that funds set the trend. Staying in step with the noncommercial side is a better position than standing in front of a train, slow moving or runaway, it makes no difference.
Will Watson view corn as a good buy as we get deeper into the 2024 harvest? One theory is that some of the money being generated by U.S. stock indexes continuing to hit new all-time highs will move into the commodity sector. This is a possibility, but if so, Watson will be looking for those markets with long-term bullish fundamentals.
Two of the three Kings of Commodities seem to fit that bill with gold extending its move to fresh all-time highs due to lower interest rates and a weaker U.S. dollar while WTI crude oil has an inverted forward curve (a forward curve is a line plotting all the futures contracts, another way to look at futures spreads. In this case, nearby futures contracts are higher priced than deferred meaning the commercial side is pushing the nearby market to source supplies.
When talking about a storable commodity, inverted futures spreads/forward curves are always fundamentally bullish.) The outlier is King Corn, again with the exception being the weak carry of the May-July futures spread.
The last time corn came out of a long-term downtrend was back in the fall of 2014. From there it traded sideways through the fall of 2020, but times have changed. We’ll see if Watson views this as a good buy (opportunity to build a net-long futures position) or goodbye (simply cover the net-short and move to the sidelines in favor of other more fundamentally bullish markets). Stay tuned.
