when the commercials become net long futures contracts,
a major bottom has formed. This occurred with corn in
the second half of 2009 as commercials (farmers, elevators,
and end users like Cargill) decided to go long, betting
with their wallets and their operations that current
corn prices are very cheap and that higher prices are
likely in store in the months ahead.
commercial entities do not share the current bearish
outlook on corn prices widely embraced by the analyst
community. For some reason, they see a bottom in prices
where others do not. It has been a major mistake in
the past to bet against the commercial players’ collective
wisdom, as who knows these markets any better than the
people who grow and use corn on a regular basis.
be that the corn crop has not met record yield expectations?
Could it be that China, given their terrible corn crop,
is already buying corn through intermediaries in the
United States that we will only find out about at a
later date? Could it be that the ethanol plants are
consuming far more corn and producing much more ethanol
than current expectations? Or is it something totally
different that is not readily identifiable at this moment
No one knows
the answer for sure, but for some reason the commercial
operators have taken a very bullish stance that should
not be ignored. Over the next several months the answer
will become clear and by that time, corn prices may
have already moved up substantially.
another reason to be bullish corn: seasonal price patterns.
Historically, corn prices tend to reach harvest lows
in the fourth quarter. Why would it be any different
So not only
are the commercials flashing buy signals with their
futures activities, but they are doing so at a time
of the year where most major bottoms in the corn market
tend to form.
2010 futures corn spread suggests that a major spike
may be imminent as the end of the long-term wedge formation
approaches (see “Popping corn”). The odds favor a bullish
breakout of this formation given the commercial net
long positions, favorable seasonal patterns and the
likelihood of a reduction in U.S. corn yields in the
January 2010 USDA report.
past tight supply/demand markets, this spread had achieved
levels near 40¢ per bushel. The 40-year historical lows
have been near -20¢. In early December the spread stood
at -12¢. This gives you a very attractive risk profile.
If you go long at -12¢ and the spread reached 40¢, that
is $2,500 per one lot. With a stop at -20¢, you risk
a loss of $400 per spread. The margin requirement for
this spread is around $210 per one lot.
likely will occur to provide the catalyst for a bullish
breakout in corn prices and the bull spread. Possible
actual corn yields coming off the combine in November/December,
negating the current record yield expectations. The
November USDA report downgraded yields to the 162 bu.
per acre level from 165. Expect the January USDA report
to drop yields to under 160.
major downgrading of China’s corn crop by the USDA and
the confirmation of large Chinese purchases of U.S.
corn. Already the USDA has pared back production from
the 165 million metric ton level to the 155 mmt level.
Expect a decline below 150 mmt come January.
domestic ethanol demand from current expectations given
the improved economic rationalization of the industry
against a very profitable ethanol refinery margin environment.
4) Drop in
quality and other wildcards. Excessive wet weather that
led to a near record late harvest could drop the quality
of corn due to moisture-related damage. Also continued
weakness in the dollar could send prices higher regardless
that are set for corn during this cycle when the final
bottom is clear (so far that bottom stands at $3 in
the spot price) likely will turn out to be multi-year
lows, if not decade lows. This is an historic moment
to buy corn.
the bull futures spread strategy until a clear price
breakout is established with supporting fundamental
data is the safer way to exploit this bullish view.
Once such signals become clear, the lifting of the short
side of these spreads would be highly recommended for
those more aggressive traders.
Hackett, commodities broker and author of the Hackett
Money Flow report newsletter (hackettadvisors.com),
is a nationally recognized agricultural commodities
expert with more than 15 years of money managament experience.