Corn: Summer Review and Outlook

An Opportunity Worth the Wait

Jake Hanley, CMT Managing Director / Sr. Portfolio Strategist | July 26, 2024

 

Front-month corn futures prices are down nearly 12% year-to-date. This should not come as a surprise as Teucrium’s base case for 2024, published in our 2024 Outlook, called for lower prices driven by expectations of growing global and domestic supplies.

We projected that prices would move back towards the cost of production, around $3.50 - $4.00 per bushel. Currently, the front-month contract is trading near $4, having dipped below that level at times, below which is arguably the cost of production range.

Still, as we head toward the harvest, prices may decline further yet.

Harvest Lows on the Horizon?

It’s the mid-point of the growing season and the U.S. corn crop is in really good shape. With a 67% good to excellent rating, the crop is healthy, and we are likely to see a substantial yield, potentially exceeding USDA trendline estimates.[1]

The price pressure we’ve seen reflects the expectation for a large crop. We expect the pricing pressure to persist through harvest which is when prices have historically registered their annual lows.

This time around, we believe the seasonal low will take corn prices back below $4 per bushel, perhaps as low as $3.50. At those levels where we believe additional downside risk would likely be limited, and we would expect to see investment money begin to allocate to corn in earnest. After all, when trading at or near the cost of production, corn below $4 is similar to oil below $40.

Entering a trading range near the cost of production means that corn will have re-entered the first stage of a time-tested cycle we refer to as The Golden Grain Cycle.

 

The Golden Grain Cycle

There are three Stages in the Golden Grain Cycle:

Stage 1 - Prices trade at or near the cost of production

Stage 2 - Prices advance amid a supply/demand imbalance

Stage 3 - Supplies build due to increase output and prices head back toward the cost of production.

Our call for lower prices in 2024 was consistent with the idea that we’ve been in Stage 3 of the Golden Grain Cycle and more than 2-years since putting in the 2022 highs, corn prices are transitioning to a new Stage 1.

How long prices will remain in Stage 1 is uncertain, but historically bull markets in corn are driven by a supply-demand imbalance. Supply can be curtailed by adverse weather conditions, such as droughts, while prices can also react to external risk factors like global conflicts and trade policies.

As you can see on the chart below, 3 times in the past 17 years corn prices have more than doubled from around the same prices at which they are trading today.

 

 

A Matter of Time and Timing

At a recent seminar for financial professionals, we presented the following chart and asked which period would be a better time to consider establishing price exposure to corn futures?

Period A or B?

The majority of the audience chose option A.

Period A represents Stage 1 of the Golden Grain Cycle and as noted above, after more than two years prices are just now moving into a new Stage 1. Those seeking alternative investments outside of stocks and bonds, may choose to consider exposure to corn futures. Given that prices are approaching the cost of production, further downside risk may be limited. This suggests that the longer-term risk could be to the upside. Perhaps this is an opportunity worth the wait.

Summary

Expectations are building for a substantial U.S. corn harvest. This is likely to result in continued price pressure through the fall. Prices may establish calendar year lows coinciding with the autumn harvest. We estimate the national average futures equivalent cost of corn production to be between $3.50 and $4 per bushel. As such prices at these levels may have limited additional downside.

Historically corn prices have traded at or near production cost for an extended period (Stage 1). Given the potential for limited downside, the price risk is to the upside. At a time of significant uncertainty in capital markets and in the world as a whole, those looking to allocate to alternative assets may find it worthwhile to consider price exposure to corn.

 

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