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4 reasons why we could get the seasonal bounce that market bulls have been waiting for.

Jim McCormick, Hedging strategist

May 22, 2020

4 Min Read

The recent trading action in corn futures has been rather frustrating for bulls. While we have been stuck in a 25-cent trading range for five weeks now, we do believe there is reason for optimism that corn can break out of the range sooner rather than later.

As Mark Twain wrote, "history doesn't repeat itself, but it often rhymes." 

A history lesson

In 19 of the past 20 years, the high price during the growing season for new crop corn futures exceeded the insurance price that was set in February. On average futures traded 57 cents, or 14.86%, above the insurance price.

Given this year's insurance price of $3.88, that would imply $4.45 which at this stage seems highly unlikely. The maximum high above insurance price was $2.48 which occurred in 2008 at the peak of the last commodity super cycle that ended abruptly due to the mortgage backed security crisis.

The one exception to trading above the spring price average was in 2001 when the summer growing season high was equal to the insurance price.

Maybe matching the spring insurance price is our best hope for now which would be a 55-cent run from here.

Managed money

Another reason to look for a rally in the corn market is the managed money positions. The net Managed Money (fund) positon was short a net 214,679 contracts of corn coming into this week's trade. The only time they were this short or more for this week of the year was last year.

To be clear, funds are not near their record short (-344,185 contracts on 4/23/2019), but we are in a period of time where the managed money crowd does not typically carry a short position of more than 200k contracts. There are only five weeks since 2007 that managed money has been short more than 200k contracts during the May, June, July, and August time frame. That's only 2.25% of the time. 

Weather rally?

Weather could also start to take some bushels off the market as well. Heavy rains across portions of the midwest have producers talking prevent plant again this year. As of last Sunday, there were still 6.2 million acres of corn unplanted in IL, IN, MI, and OH.

For the economic reasons, we could see some of those acres go into to prevent plant. The PP date for the majority of the area is June 5th.

Reports out of the northern plains suggest that 2 million acres of corn could easily be put in to prevent plant due to saturated soils. North Dakota’s prevent plant date is May 31st. As of Sunday the 17th, 6% of North Dakota’s 2019 corn crop had yet to be harvested.  

Ethanol comeback

One last bit of optimism regarding the corn market is that the ethanol industry is coming back online. As the nation comes out of the lockdown due to COVID-19, miles driven are increasing which in turn increases demand for ethanol. Ethanol production last week increased 46,000 barrels per day while blender demand was up 14,000 barrels per day and ethanol stocks dropped 600,000 barrels. Corn used in last week's ethanol production is estimated at 68 million bushels. 

History seems to be lining up for a move higher. Let’s hope Mark Twain was right and we get the seasonal bounce that market bulls have been waiting for.

Contact McCormick directly at 815-665-0461 or anyone on the AgMarket.Net team at 844-4AGMRKT.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. AgMarket.Net is the Farm Division of John Stewart and Associates (JSA) based out of St Joe, MO and all futures and options trades are cleared through ADMIS in Chicago IL. This material has been prepared by an agent of JSA or a third party and is, or is in the nature of, a solicitation. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading infromation and advice is based on information taken from 3rd party sources that are believed to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. The services provided by JSA may not be available in all jurisdictions. It is possible that the country in which you are a resident prohibits us from opening and maintaining an account for you. 

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

About the Author(s)

Jim McCormick

Hedging strategist, AgMarket.Net

Before joining AgMarket.Net, Jim was a senior broker with a nationally recognized firm and has 24 years of experience as a registered commodity representative, servicing both commercial and individual trading and hedging customers. He specializes in hedging and trading strategies using combinations of forward contracting, futures and options for corn and soybean farmers and livestock producers. He has a Series 3 futures brokerage license and earned a bachelor’s degree in Agribusiness Management from Purdue University.

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