Corn Price Drop Could Continue

Corn market participants have seen a sharp decline after prices peaked in the spring of 2022. The resumption of last year’s planting season saw prices peak at $6.30 based on December 2023 new crop futures. Many farmers/producers held on to their crops, anticipating higher prices. However, record production in the U.S. and Brazil led to oversupply, causing prices to plummet. As a result, U.S. corn storage on farms jumped 16% from a year ago to a record high. Farmers are now facing storage costs in a higher interest rate environment while hoping for a price rebound, but with prices just above $4 per bushel and a breakeven point just above $5.00, selling will have to happen on price rallies.

Are New Lows for December 2024 Futures Coming?

Source: Bar chart

The downward price trend that followed the resumption of the 2024 planting season continues persistently. Last Friday’s USDA report was generally bullish on corn, but it was sold aggressively as prices declined to trend lows. The December 2024 futures contract low was created in 2020 at $3.95. At the time of writing, the lowest price in this seasonal downtrend since May was $4.03.

Will Funds Push Corn Market to New Contract Lows?

Source: Drought.gov

The recent drought map from July 9 shows the U.S. Corn Belt from Nebraska to Ohio with good moisture levels for newly planted corn as it enters its pollination period. There is no evidence of flooding or rain too heavy to cause problems. Looking at Iowa, the largest corn producer, where in 2023 it produced 16% of the nation’s corn, things are looking great for this time of year.

Merchant Engagement Report (COT)

Source: CMEGroup Exchange

The recent COT report shows a significant selling trend by producers (red bars) as prices (yellow line) hit their May/June highs. Notice how, as prices declined from the initial May peak, there was a slight rebound in prices and sellers became aggressive. Producers will need more of these slight rebounds to cover the old crop they are storing.

Source: CMEGroup Exchange

Managed Money’s COT report for traders goes back to 2006. Their net position (yellow line) in the corn market is short. They hold a record number of short positions. For more clarity on the COT report, I wrote an article for Barchart, “A Trader Engagement Report with More Transparency.”

Source: CMEGroup Exchange

The processors’ COT report for the same period in 2006 shows that they have reached record net long positions (yellow line). This reflects the fact that corn processors have been buying aggressively while producers are waiting for a recovery to sell.

When managed fund traders hit record levels of short positions like these, many people think a market could reverse higher because of the imbalance between long and short positions. And they’re usually right.

Look at the table below the chart. We can see that the producer’s short positions currently stand at 467K contracts, compared to 620K contracts at the same time last year. This confirms that a significant amount of corn stored on the farm needs to be valued (covered) soon.

Because of this need to fix the price (hedge) of their old crop, future price increases will be offset by sales. Producers will sell and the managed money will feed their profitable short positions, leaving it to commercial processors and swap dealers to buy.

Source: CMEGroup Exchange.

Swap traders have been long corn since 2006 and continue to buy for their hedged accounts. Their trading size allows them to absorb a significant portion of the sales from producers and managed funds. Their purchases will provide the liquidity needed to allow shorts to push prices significantly lower. All trends come to an end, but for now, corn appears to have much lower prices ahead.

Seasonal model

An upcoming seasonal selling trend could increase supply in this already crowded market. Seasonal trends do not necessarily cause market fluctuations. However, if there is a prevailing trend and fundamentals supporting the seasonal trend, then prices are more likely to repeat their historical trends.

Source: Moore Research Center, Inc. (MRCI)

MRCI research has highlighted a seasonal selling pattern (blue line) that may be worth a trader’s attention. The seasonal window (yellow box) for selling the corn market has a history of closing lower around August 7 than around July 19 for 12 of the last 15 years, with an efficient pattern of 80%.

Corn may seem very oversold, but it can still go down. If you need an example of how prices can go up or down relative to expectations, look at the U.S. stock market and how many people tried to predict a high because it seemed high. Corn has two of the biggest players in the market, producers and managed funds, who need and want to sell more corn contracts.

Source: MRCI

Due to producers’ annual needs to hedge their corn prices, this seasonal model has a good track record. Note that four of the 15 years have not recorded a daily closing decline.

It is important to note that while seasonal trends can provide valuable information, they should not be the sole basis for trading decisions. Traders should consider other technical and fundamental indicators, risk management strategies, and market conditions to make informed and balanced trading choices..

In conclusion…..

Corn market participants have faced a significant decline in prices since the spring 2022 peak at $6.30 per bushel based on December 2023 futures. Many farmers, anticipating higher prices, have stored their crops, but record production in the U.S. and Brazil has led to oversupply, causing prices to fall to just over $4 per bushel. With storage costs rising amid higher interest rates, farmers are under pressure to sell, but current prices are below the breakeven point of just over $5.00. Despite a bullish USDA report, the market continues its downward trend, approaching the December 2024 futures low of $3.95. The latest COT report shows managed fund traders holding record short positions while processors are holding significant long positions. This imbalance suggests a potential market reversal, but the current trend indicates continued price declines. Seasonal patterns, supported by prevailing trends and fundamentals, anticipate further price declines, as historical data shows a downward price trend in early August. Traders are advised to consider a range of technical and fundamental indicators as well as seasonal patterns to make informed trading decisions.

More stock news from Barchart

As of the date of publication, Don Dawson did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data contained in this article are provided for informational purposes only. For more information, please see Barchart’s disclosure policy here.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.