Corn is a multipurpose commodity. Corn is a cereal crop and a member of the grass family that feeds the world. Varieties of corn product numerous food products and animal feed. High-fructose corn syrup, corn starch, corn oil, and lysine are direct corn products. Ethanol, a biofuel, is a corn product in the United States, the world’s leading producer and exporter of the coarse grain. All gasoline that powers automobiles in the US contain the biofuel. Ethanol is a legacy fuel in the US’s quest to achieve energy independence from the Middle East.
Processing corn into components creates many products. Dry milling produces corn flour, meal, grits, and other products. Wet milling separates corn into starch (syrup, ethanol, and corn starch), germ (OIL), and gluten (animal feed). Corn’s all-time high on the CBOT futures market came in 2012 when a drought lifted the price of nearby futures to $8.4375 per bushel. The price of corn futures has traded below $4.65 since 2014. In late October 2020, the price was approaching that critical technical resistance level.
The Teucrium Corn ETF product (CORN) tracks the price of three actively traded corn futures contracts that trade on the CME’s CBOT division.
New highs for 2020 in the corn market
The August derecho in the US, a falling dollar, and the ever-increasing demand for food as the global population rises have been a potent bullish cocktail for the corn futures market since mid-August.
As the weekly chart highlights, corn futures reached a low for 2020 at $3.0025 per bushel in late April as the US moved into the planting and growing season. In August, the price of the coarse grain fell to a high low of $3.0725. The derecho lit a bullish fuse in the corn market as it took the price of grains and oilseeds higher over the past three months. In October, corn rose to a new high for 2020, and the highest price since July 2019. On October 27, the price traded to a peak of $4.2225 per bushel.
The total number of open long and short positions in the CBOT corn futures market has been rising with the price even as the 2020 harvest ends. The increase in open interest as the price appreciated is typically a technical validation of the bullish trend in a futures market. As we move past the 2020 harvest, it is also a sign of growing speculative interest and consumer hedging in the corn market.
Price momentum and relative strength indicators are rising and heading for overbought conditions on the weekly chart. Weekly historical volatility at almost 22% is around the midpoint of the range for 2020.
Meanwhile, the quarterly chart shows that the rally in the corn futures arena could just be getting underway. The critical levels of technical resistance stand at the April 2019 high of $4.6425 and the April 2014 peak of $5.1950 per bushel.
Ethanol prices rise with the grain
In the United States, corn is the primary ingredient in the biofuel ethanol. Even though crude oil and gasoline prices have been stable over the past months, ethanol’s price has moved higher with the corn futures market.
The weekly chart of ethanol futures shows that the price rose from a low of 79.9 cents per gallon in early April to the most recent high of $1.57 on October 26. Ethanol rallied by 96.5% over the past seven months. The next level of technical resistance is nearby at the September 2019 high of $1.573. Above there, the June 2019 peak of $1.645 per gallon is the critical level on the upside. Ethanol futures were trading at the $1.55 level on October 27. Ethanol and corn prices have a high correlation in the US. In Brazil, the price of the biofuel is closely linked with sugar as it is the primary ingredient in ethanol production in the South American country. Meanwhile, sugar futures have also appreciated dramatically over the past months.
As the chart shows, sugar futures on ICE rose from a low of 9.05 cents in late April to the 14.90 level on October 27 or 64.6%. Corn, sugar, and ethanol have posted impressive gains in 2020.
The spread between gasoline and ethanol widens
Corn’s move of 40.6% from the 2020 low to the high has caused the spread between gasoline and ethanol to move to the widest level since 2016.
The weekly chart shows that gasoline was trading at an almost 41 cents per gallon discount to ethanol on October 27. The spread has not been this wide since February 2016 when it reached 44.7 cents. Rising corn prices are making ethanol expensive compared to the oil product. The ethanol mandate in the US continues to require gasoline refiners to use a blend of fuels. The higher the price of corn rises, the more upside pressure on ethanol.
The price of the biofuel must rise with corn in the US, or refiners that process the coarse grain into fuel will see earnings turn to losses.
The latest fundamental data and the election polls could be lifting the price of corn
The USDA’s October World Agricultural Supply and Demand Estimates report, the gold standard for corn fundamentals, told the market that 2020/2021 production and ending stocks declined compared to the September report. Moreover, global corn inventories fell from the previous month. The USDA increased its price projection for corn in the October report.
Meanwhile, the November 3 US election could have significant ramifications for the corn market in the US. Democrats favor a decline in the production of fossil fuels. The potential for a rise in the demand for biofuel could also be lifting the price of corn. With one week to go before the contest, polls continue to point to a blue wave. However, the projections in 2016 were wrong, and time will tell if the opposition party captures the White House and Senate, which could set the stage for a shift in US energy policy over the coming years.
CORN is the corn ETF product
If corn can move above the $4.65 per bushel level, it could unleash a wave of technical buying from speculators and hedgers. The path of least resistance for corn over the coming months will depend on the weather in critical growing regions. However, a falling dollar is bullish for corn and all commodities. Simultaneously, central bank liquidity and government stimulus in response to the global pandemic increase the money supply, which is inflationary. Population growth puts ever-increasing pressure on the demand side of the fundamental equation for corn. Any weather issues that weigh on supplies could have explosive consequences for the corn futures market in 2021.
The most direct route for a risk position in corn is via the futures and futures options that trade on the CME’s CBOT division. The Teucrium Corn Fund (CORN) provides an alternative for market participants looking to participate in the agricultural product. The fund summary and top holdings of CORN include:
Source: Yahoo Finance
CORN has net assets of $152.84 million, trades an average of 367,123 shares each day, and charges a 1.11% expense ratio. CORN holds a blend of three actively traded CBOT corn futures contracts. Since the most volatility tends to occur in the nearby contract, CORN tends to underperform the price of the nearby futures on the upside and outperform during downside corrections. The continuous corn futures contract moved 40.6% higher from the 2020 low to the high on October 27.
As the chart shows, CORN’s low for the year came in early August at $11.52 and rose to the most recent high of $13.89 this month, a rally of 20.6%. CORN is a product that is likely to appreciate with the price of the coarse grain if the trend continues.
Corn has been popping higher since August. The commodity that feeds and fuels the world is in bullish mode as we head towards the end of 2020. I would be a buyer of corn on any price corrections to establish a long position for 2021.
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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.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.