From the November 2013 issue of Futures Magazine • Subscribe!

Harvesting profits from corn fundamentals

With the summer of 2013 now well behind us, harvests are in full swing through much of the United States. Farmers are busy filling their barns with the bounty of a hard summer’s work. 

For investors, however, it’s a different story. Many traders who have picked up a newspaper in the past 12 months are weary of playing the “will they/won’t they” game with the Federal Reserve. Every time Bernanke blinks, the stock market jolts one way or the other. We’ve seen a fascinating bull run in stocks and yet investors still don’t trust it. We really want to accept it, but for some of us, it just doesn’t feel quite right.

Instead, you can leave the whims of the Fed behind and focus on a market whose price direction has less to do with unknown policy changes and more to do with core supply/demand fundamentals and seasonal cycles. The basic agricultural markets offer these qualities.

And none is more basic or more interesting right now than corn. For traders looking to harvest some bounty of their own this fall, they can consider a simple strategy that can profit without taking wild risks, having perfect timing or even picking outright price direction.

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Before you can understand how to make money in the corn market, you must first understand the supply/demand factors driving corn prices. These fundamentals are paramount in establishing the long-term price direction of any commodity.

The 2013 season has been a banner year for corn production in the United States. By late July, the U.S. Department of Agriculture was projecting the United States would produce 13.95 billion bushels of corn this year — the most ever.

It is true that corn farmers have increased corn acreage in response to record demand. However, available supplies are likely to outpace demand by a wide margin in the 2013-14 crop year. Ending stocks for next year are pegged at a whopping 1.959 billion bushels. This is almost double 2012 ending stocks and eclipsing this year’s projected ending stocks by nearly 150% (see “Leftovers,” below). Ending stocks represent the amount of the commodity left over in a given crop year (usually September) after all demand has been met. This number can cast a wide shadow over price direction throughout the year. 

The reasons for this increased corn production are many. At $5 to $7 per bushel, corn is a profitable choice for farmers. As global demand gradually has pushed higher over the past several years, so have corn prices. Farmers respond by growing more corn to take advantage of the higher price brought on by demand. 

The agricultural industry has more than held its own in meeting rising global demand for grains, corn in particular. The genetically modified seed industry has produced higher-yielding, and pest- and drought-resistant crops. Along with better irrigation and farming skills, this has resulted in not only higher yields but a larger growing region for corn. This is why corn is now seen growing in the former wheat fields of the Midwest and former cotton and peanut fields of the South.

Corn acreage accounted for 25% of U.S. fields in 2000. This year it was 30%. More impressive, however, is the growth in yield. In the early 1980s, an acre of corn could be expected to yield about 102 bushels per growing season. In 2013, that figure is 157 bushels. 

Weather is always a possible concern, but while hot temperatures and low moisture hampered conditions in 2012, this year has been much more favorable.

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