Missed the Rally in Corn and Soybeans? | Blog
Teucrium | September 14, 2020
Whether you trade fundamentals, technicals, or a combination of both, there is one way to make money; buy low and sell high.
For those who might have missed the recent run up in grain prices and are looking for an entry point, your opportunity may be on the horizon.
The seasonal lows for corn and soybean prices typically occur in late September and early October. This coincides with the autumn harvest and a replenishing of supply. Corn and soybeans are only harvested once per year in the Northern Hemisphere, which includes the world’s two largest corn producing countries: China and the US.
Demand, however, persists year-round. Supply is continually drawn down all the way through the summer months while the new crop (next harvest) is still in the ground. The uncertainty surrounding the new crop bounty, along with a dwindling supply, typically results in corn and soybean prices reaching their annual highs in June and July (see charts below).
Source: Signal Trading Group (www.signaltradingggroup.com) Used with permission. Past performance is not indicative of future results.
About the Data: The seasonal chart above provides a historic reference of past trends for the corn market. Average prices over the 20 and 30 year periods are reflective of daily 1st month (spot month) contract data from January 1990, to December 31, 2019.
Source: Signal Trading Group (www.signaltradingggroup.com) Used with permission. Past performance is not indicative of future results. About the Data: The seasonal chart above provides a historic reference of past trends for the soybean market. Average prices over the 20 and 30 year periods are reflective of daily 1st month (spot month) contract data from January 1990, to December 31, 2019
Corn and soybean prices have not strictly followed the seasonal patterns this year. Complications surrounding the COVID-19 pandemic certainly have played a role.
Government imposed shutdowns all but extinguished gasoline demand putting significant pressure on corn prices. In the U.S. corn is primarily used to make ethanol which is blended with gasoline. Ethanol demand therefore plummeted as travel came to a virtual standstill and much of the economy transitioned to work from home.
Soybeans sold off as well, though the selling at the time appeared to have been in reaction to lower corn prices versus the fundamentals in the soybean market. Corn and soybeans have similar uses throughout the global economy. Feeding animals is the primary use for both grains across the globe. Therefore, the prices movements between corn and soybeans are highly correlated, though not perfectly so.
Soybean prices bottomed in March and have been in a clear upward trend since April. Corn prices did not bottom until the end of April. As of this writing soybeans have recently closed a 52 week high of $10.05. Corn prices have rallied but are still about $0.30 below the 52 week high set back in October.
While it is entirely possible that corn and soybean prices continue to rally through the harvest, caution may be warranted. The relative strength index[1] for both corn and soybeans is signaling “overbought” conditions. Investors who follow trends often point to the RSI to signal a potential trend reversal.
Taking into consideration seasonal factors as well as the overbought conditions we believe there could be a pause in the corn and soybean price rally. Should that happen, it may prove to be an opportunity for allocators looking for an entry point into the grains.
Chart Created by Teucrium using Bloomberg Finance L.P. on September 14, 2020
Prices are expressed in 1/100th of $1 i.e. 365 = $3.6500
This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results. The information and data contained herein do not constitute investment advice offered by Teucrium Trading, LLC and are provided solely for informational purposes.
For this purpose, corn commodity values are representative of the futures (generic first con futures contract - < C 1 Comdty>) spot continuation chart as defined by and sourced on Bloomberg: Generic contracts, such as C 1, C 2, C 3,…,are constructed by pasting together “rolling” contracts according to the pre-selected roll types on the commodity default page. The generic contract uses the value of a particular contract month until it “rolls” to the next month in the series. You can access a generic contract by replacing the month/year code with the number 1, i.e. C 1<COMDTY>. Replacing the month/year code with the number 1 will yield the spot contract.”
Chart Created by Teucrium using Bloomberg Finance L.P. on September 14, 2020
Prices are expressed in 1/100th of $1 i.e. 1005 /12 = $10.0550
This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results. The information and data contained herein do not constitute investment advice offered by Teucrium Trading, LLC and are provided solely for informational purposes.
For this purpose, soybean commodity values are representative of the futures (generic first con futures contract - < S 1 Comdty>) spot continuation chart as defined by and sourced on Bloomberg: Generic contracts, such as S 1, S 2, S 3,…,are constructed by pasting together “rolling” contracts according to the pre-selected roll types on the commodity default page. The generic contract uses the value of a particular contract month until it “rolls” to the next month in the series. You can access a generic contract by replacing the month/year code with the number 1, i.e. S 1<COMDTY>. Replacing the month/year code with the number 1 will yield the spot contract.”
To be certain, the fundamentals for both corn and soybeans look strong. Global demand is increasing at a time when production is struggling to keep up. Weather and infestations have presented significant challenges for Chinese farmers which is helping boost Chinese imports of US soybeans and corn. Furthermore, NOAA recently confirmed that a La Nina climate pattern has developed and is likely to persist through the winter. Stronger La Ninas have historically presented issues for global food production. The La Nina in 2011 likely contributed to a spike above $7 per bushel for corn and $15 per bushel for soybeans.
From a portfolio perspective, investors with whom we speak, are increasingly looking for assets with low correlations to equities. Grains certainly fit that bill. In fact, in grains out-performed equities on the downside 10 out of the last 11 stock market corrections of 10% or more (see chart below).
Note that options are available on both the Corn (Ticker: CORN) and Soybean (Ticker: SOYB) ETFs. Please speak with your broker and/or financial advisor.
[1] Relative Strength Index (RSI) – Compares a security’s prices using “up” and “down” days to determine the security’s strength relative to it’s price history. A higher number indicates buyer enthusiasm, and a lower number indicates seller enthusiasm. At extreme levels market participants may conclude that a security is “overbought,” or “oversold.”