Agriculture was a hot play for the first half of 2022, but it began to fizzle out in late May as we saw some of the pressure created by the Russia-Ukraine was relieved and many grains followed their seasonal pattern of dropping over the summer.
But one grain I'll highlight appears to have the potential for a healthy gain here: and that's corn. We're seeing a combination of declining production and demand that remains robust as a catalyst for higher prices.
From the USDA:
U.S. corn production dropped 5% from 2021 to 146 million bushels on a 1.6 bushel per acre yield drop to 175.4 bushels.
Corn production totaled 14,359 million bushels.
Corn ending stocks for 2022/23 dropped 81 million bushels to 1,388 million bushels.
Drought is playing a significant role due to changing weather patterns. Iowa is a key producer, and it is unlikely to have a significant harvest this year as heat and dryness have impacted yields. Many of the fields are looking worse than last summer, and some are even falling behind historical trends.
Corn usage in the 2021/22 marketing year fell 20 million bushels on changes to food, seed, and industrial usage.
Corn usage fell by 45 million bushels for 2022/23 on lower feed and residual and export forecasts.
With production falling by about 700 million bushels, and demand only falling by 45 million bushels, there is a disparity here that will likely cause prices to move higher as we head into the fourth quarter.
Corn is a rather tight market because it is an incredibly important crop, used in many different applications, varying from animal feed, ethanol, to high fructose corn syrup, to a variety of other food ingredients and other applications.
On Friday there was a significant purchase of December $9 corn calls, suggesting that at least one institutional player may be seeing the same thing I am outlining in this article. There have been other similar trades in corn calls that are looking for higher prices toward the end of the year as well.
Spot corn pricing made a higher low and is rallying from that base and through key areas of overhead supply, stopping just short of a major breakout. I'd like to see a weekly close above $685 to feel like this breakout is in progress. From there I believe we have a path to $725, and from there a second potential price target of $755, and finally $813.50.
On the risk management side, I would be closing out any longs with a break below the weekly EMA(8) or $685.
The CORN ETF seems like a reasonable proxy if one is not playing the trade through futures contracts or from stocks that may benefit, such as ADM.
As always, I hope this information is helpful. This article is not meant to be investing or trading advice, but rather an idea to consider if it fits one's risk management, financial goals, and comport's with one's trading style. Remember, commodities can be very volatile, and at times illiquid.
If there are any questions please let me know in the comments!