Tag Archives: corn market

COT Report Tips Corn Traders

While many of the agricultural markets are finding increasing acreage on a global basis thus decreasing U.S. domination, the corn market is still the primary domain of the U.S. agricultural markets. As such, the Chicago Mercantile Exchange Group’s corn futures contract is the primary hedging tool. As such, the actions of this market’s biggest players are tracked on a weekly basis by the Commodity Futures Trading Commission’s, Commitment of Traders (COT) report. Here’s how to use this report to determine market bias in advance of major governmental agricultural reports by the USDA and World Agriculture Board. While the illustration is based on the current events of the corn market, the methodology is robust across many commodity markets.

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Corn Market Analysis for Equities.com

Commercial corn traders have played this year’s market like the veteran traders they are. They collectively sold more than 370,000 contracts during planting season and have now come in as active buyers in the corn futures. recently repurchasing more than 120,000 contracts.

We discuss the impacts of the commercial corn traders via the CFTC’s Commitment of Traders report in this morning’s feature for Equities.com in , “Corn Market Finding Support.”

You can see other examples of our recently published analysis at COTSignals.com Recent Trades. You can also sign up for a FREE 30 day trial at COTSignals Signup and have our nightly worksheet delivered straight to your email.

commercial corn trader futures chart
Commercial corn users buying at value prices.

We also walked through the same scenario in the soybean market for TraderPlanet, yesterday in Global Food Dynamics Impact U.S. Grains: Soybeans at a Turning Point?

Corn Base Forming Well

The corn market is balancing several factors as we move towards the US planting season. On one hand, we have the bearish factors of a record global corn crop and the largest year ending stocks since 2001. On the other hand, we are witnessing a rapid and sustained growth in exports along with weather complications taking their toll on South American supplies. Given the technical and seasonal factors at play in this market, I think we have finally put in the post 2013 harvest lows and could continue higher into the planting season.

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Finding a Bottom in the Corn Market

The 2013 United States’ corn crop started off with predictions of being the largest ever. This was primarily due to the USDA acreage report issued on June 28th that showed 97.4 million acres planted for corn. This was the highest acreage allotted to corn since 1936 and also marked the fifth consecutive year of acreage gains for corn. This caused December corn futures (this year’s crop) to fall 9% in the next few trading sessions. Even though the market is now trading even lower than it was then, I think there are signs pointing to a bottom in this market. End line users should take advantage of the lowest prices we’ve seen in over a year.

Record planted acreage along with trend line yields would produce the largest corn crop in history. However, the University of Illinois pointed out as recently as last week that the USDA’s planting intentions report of June 28th won’t materialize the way the market initially reacted. The Fighting Illini pointed towards the prevented plantings number to support their argument that corn acreage may be more than 8 million acres less than originally forecasted. This is primarily due to the lateness of this year’s plantings. Furthermore, they comment on the currently declining characteristics of the corn crop condition, which may impact yields if pollination doesn’t get the weather it needs.

We often talk about a market’s, “fear premium.” Fear premium is the market participants’ disproportional concern of the market moving one direction instead of the other. Fear premium in the grain markets is always on the high side. Call options, which make money when the market goes up are always more expensive than put options in the grain markets. The difference between the current market price and the price of a put and a call option equally distant from the current price is 0 in an unbiased market. However, call options currently have a built in fear premium of approximately 30%. Therefore, the markets’ participants are 30% more concerned about prices moving higher by $.50 per bushel than the market falling by another $.50 per bushel.

End line users of corn have been stocking up on futures contracts with abandon. This is another good way of determining the underlying value of a market. The Commodity Futures Trading Commission issues it Commitment of Traders Report every week. The report tracks the market’s largest traders and categorizes them according their type of trading. Primarily, we look at three groups of traders – speculators, index funds and finally, commercial traders. We focus on the commercial trader category. It is our belief that those who produce the good and those who sell the good have the best understanding of a market’s value. Farmers, as a collective, ought to know what a fair price is for the corn they’re growing just as cereal producers or, cattle feeders should know what a fair price to pay is. End line commercial traders have built up a record position on the market’s decline. Clearly, they are willing to lock in as much of their future input needs as they’re bank accounts and storage facilities will afford them.

End line users of corn understand that even if we do end up with record acreage and good yields, we’ll still barely budge the global ending stocks number. The world currently stands at about 70 day’s worth of grain supplies. This is not just corn but an index tracked by AgriMoney that includes rice and wheat. The point of the chart published by AgriMoney is that peak production relative consumption has shifted to a deficit trend over the last 20 years. It has dwindled from 130 day’s supply in the mid 1980’s to our current level of 70 days. All things considered, this year’s US harvest could add about four days to the world’s supplies. This is hardly a drop in the bucket.

There’s no question that corn prices have been declining since the June 28th USDA acreage report and the next major report isn’t due out until August 12th. This leaves the market with time to trade its way through pollination and the trend to continue lower. However, the record net short position in managed money cannot continue to profit from corn’s decline for much longer. The market can only trade so low relative to its fundamental value. Commercial traders clearly see this market entering their value area. We’ll side with them and be on the lookout for a reversal in prices. Most importantly, we’re approaching prices that leave no more room for bearish surprises, therefore, the path of least resistance will soon turn higher.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Energy Fork in the Road

One economic topic that isn’t getting the attention it deserves is the energy policy. The drought of 2012 along with the expiration of subsidies paid to ethanol blenders will make it nearly impossible to reach the Renewable Fuels Standards (RFS) as early as next year. The standards that were put in place to increase this country’s energy independence were based on protectionist interests and were only viable as long as ethanol produced by the U.S. was subsidized while Brazilian ethanol was simultaneously taxed.

The difference between U.S. ethanol and Brazilian ethanol is the source of their primary inputs. We use corn, which is slower to grow, harder to use and more expensive than the cane sugar Brazil uses as the feedstock for their ethanol production. It will be very interesting to hear how the Presidential candidates debate their renewable energy policies, especially as 40% of our primary crop is diverted from food to energy production. This year’s drought has created a political collision course between food costs and the Renewable Fuels Mandate as well as the Energy Independence and Security Act.

The corn market is about as American as you can get. The U.S. produces as much corn as the next two largest producers, China and Brazil, combined. Unfortunately, production will fall nearly 15% short of 2011’s 314 million tons. The current Renewable Fuels Mandate allotted 40% of last year’s corn to produce 13.95 billion gallons of renewable fuel and 2012 will require an additional 8% increase over 2011. This brings total renewable fuel sources to 15.2 billion gallons on total consumption of 134 billion gallons in 2012.

The drought has pushed corn prices to an all time high of $8.43 per bushel. While the market is now 14% lower at  $7.25, the rally has been more than enough to shatter the profit margins of ethanol blenders. The combination of expiring refining subsidies along with higher input costs is leading to the shut down of major ethanol blenders. This raises the capital market question of who’s going to be responsible for meeting the aforementioned production targets? Ethanol distillers are losing more than $.40 per gallon at the current prices.

The idea of diverting 4.7 billion bushels of an estimated 11 billion bushels in total U.S. production towards an inferior yet, more expensive product seems silly in the face of rising global food prices. This is exactly what would be required to happen to meet next year’s Mandate. Furthermore, reaching next year’s goals using the current 10% ethanol blend is nearly impossible given the current mix of gasoline and diesel motors. Diesel biofuels and biodiesels are given a 50% bonus in RFS for their lower greenhouse gas emissions as measured by the EPA. The friction this creates in meeting the Renewable Fuels Mandate is called the, “blend wall.” The blend wall is the physical limitation of production and blending facilities based on the most common 10% ethanol blend. The mandate calls for 13.8 billion gallons, 10% of expected 2013 US consumption. However, current facilities, assuming they were all open and operating at full capacity, can only produce 13.3 billion gallons of ethanol.

The candidates will have to address the subsidies that farmers and blenders are paid as well as their plan on handling imports. These are most likely, the easy issues to address. Developing a complete energy plan will also include a discussion on the much more economically friendly topic of our vast natural gas reserves which have the capacity to place us on a much more sustainable path.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Corn to Rally using Crude Oil as Analog

The corn futures market was facing unprecedented demand heading into this year’s planting season. The tightest supplies since 1937 and the governmentally mandated ethanol program’s consumption of 40% of this year’s crop put extra pressure on Mother Nature to produce a record crop. We all know that this spring broke the 100-year-old record for rainfall. When we combined this with cold temperatures, flooding along the Mississippi and a southwestern drought, it became obvious that corn acreage would suffer as farmers would be forced to wait for the fields to dry and planted more beans and less corn.

Last week, the USDA issued its acreage report and the markets fell out of bed. Corn acreage planted was reported up 5% from last year at 92.3 million acres. This is the largest planted area since 1944 and second only to 2007. The market sold off nearly 12% in the next two trading sessions as traders, farmers and end line users scratched corn their heads in wonder. Message boards were lit up as people wondered how there could possibly be an increase in acreage when the main question was, “How many acres have been lost due to flood damage and the wettest spring on record?”

The USDA’s accounting methods and history of revision has been brought to the forefront of this discussion. Is the USDA turning into the Federal Reserve System and constructing its data to fit its needs? The report did create a flush in the market and ease food and ethanol prices instantaneously. The flush also washed out most trading and hedge funds on the long side of the market.

The reported acreage versus the expected acreage was one of the biggest surprises on record. One industry analyst, Rich Feltes actually found these numbers to closely match his own forecasts while Carl Zulauf from Ohio State questioned the validity of the USDA’s estimates and points to next week’s USDA Supply and Demand Report for more accurate data. Finally, some of the largest Ohio farmers don’t see any way that the acreage reports can’t be revised sharply lower.

The real issue here is, how do we trade it. The analog I’d like to pass on is crude oil’s decline to $90 per barrel on the news of Saudi Arabia’s production increase combined with waning demand in the face of a recessionary Europe. Crude oil sold off hard on a news event down to what was previously a resistance level for that market – $90 per barrel. Corn sold off on a news event down to a level that was once also considered resistance – $5.50 to $6.00 per bushel. The dynamic in crude oil has changed so that what was once resistance – $90 per barrel, is now support. I believe the same is true in the corn market. I expect the market to bounce around here as traders square their positions but ultimately, I believe the acreage numbers will decline and the acreage that has been planted will not provide the 155 bushel per acre yield expected due to delayed planting.

Ultimately, the tight corn stocks coming into this year combined with the ethanol market and growing global demand will place added stress on this year’s crop, which I believe will be smaller than the most recent USDA predictions. Therefore, this sell off in the corn market should be bought in anticipation of higher prices at harvest.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.