The Teucrium Corn Fund (CORN) provides investors unleveraged direct exposure to corn without the need for a futures account. Therefore, the decision to invest in this fund should be made after analyzing the corn market.
Corn price, as well as the price of other agricultural commodities, is affected by seasonality. And judging by the last five years, from February to May, corn futures price hasn’t demonstrated high volatility. At the same time, the current corn futures price is above its five-year high. It means that this market is definitely not bearish now.
Supply and Demand
The WASDE report, issued on January 10, at least, did not support “bears.” So, according to the USDA, the global domestic consumption in 2019/2020 will amount to 1,133.41 million tons, which is 6.18 million tons higher than the December estimates. At the same time, the USDA has raised its global production forecast by only 2.22 million tons in comparison with last month’s forecast. Accordingly, the expected deficit for this market has grown.
China is the largest producer and consumer of corn in the world. More than 69% of the global corn stocks are in China. Therefore, the internal structure of the grain balance in China significantly affects the global indicators.
However, since China actually does not export much corn, its influence on the global balances is formal. Therefore, the world corn balance should be assessed without regard to the impact of this country. But even so, according to the current USDA forecast, a deficit of 4.34 million tons is expected in the corn market in 2019/2020:
In the corn market, as a commodity market, the structure of the supply and demand balance determines the price. I use stock-to-use ratio as a universal indicator that reflects the current supply and demand balance. In this case, this ratio tells us how much inventory of corn is available for consumption.
According to the latest USDA forecast, the stock-to-use ratio for the global corn market excluding China will reach 11.6% in the 2019/2020 marketing year. And judging by the long-term relationship between the price of corn and its stock-to-use ratio, we can conclude that the current corn futures price is actually below its balanced level:
Over the past week, the money managers’ net short position in corn reduced by 2,100 contracts, amounting to 78,442 sold contracts. I want to remind you that a week earlier the funds bought 19,964 corn contracts.
Also, over the described period, the money managers were buying wheat and soybean:
So, from my point of view, the recent money managers’ actions add some positive connotation to this market.
Fundamentally, the corn market isn’t looking bearish at the moment. At the same time, judging by the mentioned seasonality, probably you shouldn’t be waiting for the upward rally either. But the technical picture indicates a high probability of the gradual increase in the CORN ETF price to the level of $15 per share in the coming month.
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.