From the November 2013 issue of Futures Magazine • Subscribe!

Harvesting profits from corn fundamentals

Opportunity knocks 

Before you go running out to short corn, hold on. The analysis described here is provided to give perspective; it is no secret to the market. Prices held at elevated levels through much of the spring while the 2013 crop was planted. However, as it became apparent that weather was favorable and the crop was developing nicely, prices fell. Corn prices tumbled more than 15% from the highs in late June through the corn pollination period in July (see “Corn slide,” below). 

While there still may be opportunities for traders to short corn on rallies this fall, the greater opportunity may be to do the opposite of the crowd and position for a harvest low. Here is why.

In commodities — agricultural commodities in particular — we have a tool that other markets don’t enjoy: Seasonal tendencies. While not perfect, seasonal analysis can help to illustrate certain supply/demand fundamentals that tend to take place at different times of the year. 

In corn, the U.S. harvest comes in the fall, sometimes starting as early as late August and finishing in late October/early November. Prices tend to peak when supplies are lowest and bottom when supplies are highest. Thus, at harvest time, when supplies are higher than they will be at any time all year, economics dictates that prices should be at their lowest.

While seasonal charts are an admittedly blunt instrument, the chart for corn seems to bear out this economic phenomenon (see “Seasonal trends,” below). While this chart is only an average of the past 15 years, it does seem to reveal a tendency for corn prices to bottom in early October. That this happens to be right in the heart of the corn harvest is no coincidence.

 

Thus, we have the term “harvest low” used by ag futures traders around the globe. Once a harvest low is achieved, prices often begin to increase gradually as demand begins to eat away at new supplies. 

Encouraging for traders who follow seasonals, corn appears to be correlating well to seasonal averages in 2013. While there obviously is no guarantee that prices will follow the seasonal average, there may be an opportunity for investors to consider during corn harvest time 2013.

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