Corn Prices Are Up - For All The Right Reasons

Corn prices are up 19% this month and 40% YTD. We believe that the fundamentals support this recent rally in corn prices. That said, prices at these levels are likely to remain volatile. A pullback is not unexpected and might even be considered “healthy.” Still, supply and demand dynamics underlying the corn market suggests that prices are likely to trade at relatively high prices for a longer period of time. 

Past performance does not guarantee future results. One cannot invest directly in an index.

Chart created by Teucrium using Bloomberg Finance L.P. on 04/26/2021

Front Month Corn Futures from 12/31/2020 – 04/26/2021

Speculative Craze?

Market rallies of this sort can lead to skepticism among some investors who may be questioning the merits of the move. The skeptic might look at corn and conclude that it is simply another asset getting caught up in the speculative frenzy that has become all too common in this era of cheap (and in some cases free) money.  

It would be easy, perhaps even fashionable, to cast aside the run up in corn prices as just another speculative craze destined to end in ruin. In our opinion, this view is short sighted and ignores the most important and fundamental factor governing corn (and for that matter all commodity) prices – SUPPLY and DEMAND.

ECON 101

Corn supplies are contracting as production is failing to keep pace with global demand. This is the fundamental factor behind the advance in corn prices. Importantly, more and more market participants are coming to the realization that the supply demand imbalance is not likely to improve anytime soon. Farmers in the US, the world’s largest corn exporting country, have begun planting this year’s crop, which is expected to yield over 15 billion bushels.[1] That is a lot of corn. However, relative to expected demand, it is still not enough to meaningfully improve the supply/demand outlook. In other words, it does not look like the supply/demand situation is going to improve much this year. Additionally, there is no guarantee that US farmers will produce 15 billion bushels of corn. Farming (even in the 21^st century) is still largely weather dependent. The weather is going to need to cooperate for there to even be a chance of farmers hitting the USDA’s current production estimate. 

Weather or Not

10 of the 18 largest corn producing states are experiencing at least a moderate drought.[2] Not surprisingly, the subsoil moisture in these areas is lacking. Some locations are faring better than others, however on average, roughly 47% of the cropland in these states is either short, or very short on subsoil moisture.[3] 

However, it is early in the season and the appropriate amount of rainfall in the right areas can improve conditions. Still, the difference between the most recent drought monitor map and last year’s map is striking. Market participants will be closely watching for any changes in drought conditions. 

A Demanding Market

Global corn usage is up nearly 20% over the last five years. Global production, however, has only increased approximately 17%. The US has been doing its part to help meet global demand by raising exports nearly 40% over the same period. Still, corn prices today are trading at 8-year highs as supplies continue to be drawn down to meet an unrelenting demand.

China is the epicenter for global corn demand. Domestic Chinese corn consumption is up roughly 26% since 2016.  Chinese corn production on the other hand is slightly lower versus 5 years ago. China has looked to make up the difference by selling state owned corn reserves and increasing foreign purchases. Concerning the latter, China is expected to import 7x as much corn this crop year compared to the 2015-2016 crop year.

This increase in Chinese imports is somewhat curious given Chinese corn demand has grown at an annual equivalent rate of approximately 5% over the past five years. So why the 140% annualized increase in corn imports?

One likely explanation is that China may have all but depleted their corn reserves. This would suggest that the surge in imports may serve a dual purpose of helping to meet current demand and rebuilding corn reserve stocks. 

If this is true, it would suggest that Chinese corn inventories heading into 2021 were not as high as previously thought. 

Sal Gilbertie, writing for Forbes last October said as much, pointing to the Chinese domestic corn price as evidence. 

“Markets are never wrong, but analysts can be, even the good people at the USDA. Global corn market prices, most especially those in China and the US, are signaling that China doesn’t have all the corn the USDA has said it has. Global corn markets are taking notice.”[4]

That quote was published roughly six months ago. Since then, US corn prices have gained nearly 64%. Any market participant that failed to take notice back in October 2020 is likely taking notice now. 

Importantly, early official estimates from the USDA suggest that Chinese corn demand is likely to remain elevated through the 2021-2022 crop year. Current prices support this thinking as well with Chinese corn futures for delivery in March 2022 trading at an 85% premium to the equivalent US corn futures.[5] The premium suggests that it may be more cost effective for Chinese buyers (and arbitrageurs) to import from the US and sell domestically in China. Chinese demand for US corn is likely to remain robust so long as these market conditions continue.

All The right Reasons

Yes, corn prices have appreciated significantly. Yes, this most recent rally has occurred over a relatively short period. Yes, it is prudent to approach any potential investment with a healthy dose of skepticism. That said, it appears to us that the advance in corn prices is happening for all the right reasons. The “right” reasons in this case can simply be boiled down to supply and demand. Corn supplies are tightening relative to demand, and prices are rising to reflect this reality. 

Please understand that market conditions can change, and they can change quickly. Prices can fall as fast (if not faster) than they rise. Note that options are available on the CORN ETF. Please consult your financial advisor and/or broker with questions pertaining to options or trading strategies in general. 

[1] According to USDA estimates

[2] United States Drought Monitor Data valid: April 20, 2021 https://droughtmonitor.unl.edu/CurrentMap.aspx

[3] USDA NASS Crop Progress Report 04/26/2021

[4] https://www.forbes.com/sites/salgilbertie/2020/10/27/does-china-really-have-63-of-world-corn-inventories-probably-not/?sh=650aa262a0b2

[5] Chinese corn futures trade on the Dalian Exchange. March 2022 is the longest dated contract available according to Bloomberg. The March 2022 Dalian corn contract closed at $10.58 on a dollar/bushel equivalent on 04/26/2021. At the time of this writing US March 2022 corn contract is trading around $5.75.