Corn prices have fallen 14% since the start of 2023. The latest USDA report points to further downside. Corn prices are expected to fizzle with expectations of a bumper harvest combined with tepid demand.
The USDA expects a record harvest of 15.27 billion bushels. The 2023/24 forecasts signal rising corn supply boosting ending stocks to their highest level since 2016/17.
To hedge against falling corn price, this case study proposes a short position using CME Corn Futures (ZCN2023) expiring in July with an entry of 586.25 and a target of 433.25, which is hedged by a stop loss at 654.25, is likely to yield a reward-to-risk ratio of 2.25x.
RECORD CORN HARVEST IS ANTICIPATED RESULTING IN SOARING ENDING STOCKS
WASDE, short for World Agricultural Supply and Demand Estimates, is a monthly report released by the US Department of Agriculture (“USDA”) that tracks the supply and demand for various agricultural commodities.
In the latest WASDE report, released on May 12th, USDA expects a record 15.3 billion bushels of corn to be harvested in the US this year.
The US is the largest producer of corn, representing 32% of total global production. Global corn production is expected to rise 6% YoY in 2023-24.
While production is robust, demand and consumption are not expected to grow as fast. Global demand is expected to rise 3.7% with US consumption expected to climb 3.4%. This will result in an oversupply of corn with soaring inventory levels (i.e., Ending stocks).
Ending stocks represent the supply of corn that is carried over to the next year. They are expected to rise 56% YoY to 2.2 billion bushels, the highest level since 2016-17. This leaves plenty of supply to accommodate any demand expansion.
A bumper harvest in October is expected to cause an oversupply pushing corn prices lower.
Despite the recent decline in corn prices, they remain significantly higher than pre-pandemic levels. With ending stocks now expected to reach pre-pandemic levels, prices will likely follow.
WEATHER MAY UPSET BUMPER HARVEST EXPECTATIONS
The WASDE estimate assumes stable weather conditions as well as demand assumptions regarding China.
Weather conditions play a huge role in final harvested yield. In the current year, drought conditions & intense heat in Argentina led to lower crop yields. With extreme weather events rising globally, it is possible that unfavorable weather may reduce the final US corn output.
China is the largest consumer of corn. With hopes of strong economic recovery still simmering, demand in China may spike higher than USDA expectations.
If supply fails or demand spikes, Corn prices may remain steady or even rise.
Asset Managers and Options Markets are positioning for Corn price to plunge
CFTC’s Commitment of Traders Report shows that asset managers have more than doubled their net short positioning in Corn futures over the last twelve (12) weeks.
Other reportable traders have reduced their net long positioning by almost 50% in the same period. Both indicate rising bearishness about corn prices.
Similar sentiment is reflected in the options market. Although June and July contracts have Put/Call ratio of ~0.85 (more calls than puts), this is before the bumper harvest is expected (August-October). The September and December contracts which expire after the harvest have a Put/Call ratio of ~1.2.
The futures forward curve, which is in backwardation, also shows expectations for prices to drop following the harvest.
TRADE SETUP
Each lot of CME Corn Futures provides exposure to 5,000 bushels of corn. A short position in CME Corn Futures expiring in July (ZCN2023) with an entry of 586.25 and a target of 433.25, which is hedged by a stop loss at 654.25, is likely to yield a reward-to-risk ratio of 2.25x.
• Entry: 586.25 ¢/bushel
• Target: 433.25 ¢/bushel
• Stop: 654.25 ¢/bushel
• Profit at Target: USD 7,650
• Loss at Stop: USD 3,400
• Reward-to-risk: 2.25x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
The USDA expects a record harvest of 15.27 billion bushels. The 2023/24 forecasts signal rising corn supply boosting ending stocks to their highest level since 2016/17.
To hedge against falling corn price, this case study proposes a short position using CME Corn Futures (ZCN2023) expiring in July with an entry of 586.25 and a target of 433.25, which is hedged by a stop loss at 654.25, is likely to yield a reward-to-risk ratio of 2.25x.
RECORD CORN HARVEST IS ANTICIPATED RESULTING IN SOARING ENDING STOCKS
WASDE, short for World Agricultural Supply and Demand Estimates, is a monthly report released by the US Department of Agriculture (“USDA”) that tracks the supply and demand for various agricultural commodities.
In the latest WASDE report, released on May 12th, USDA expects a record 15.3 billion bushels of corn to be harvested in the US this year.
The US is the largest producer of corn, representing 32% of total global production. Global corn production is expected to rise 6% YoY in 2023-24.
While production is robust, demand and consumption are not expected to grow as fast. Global demand is expected to rise 3.7% with US consumption expected to climb 3.4%. This will result in an oversupply of corn with soaring inventory levels (i.e., Ending stocks).
Ending stocks represent the supply of corn that is carried over to the next year. They are expected to rise 56% YoY to 2.2 billion bushels, the highest level since 2016-17. This leaves plenty of supply to accommodate any demand expansion.
A bumper harvest in October is expected to cause an oversupply pushing corn prices lower.
Despite the recent decline in corn prices, they remain significantly higher than pre-pandemic levels. With ending stocks now expected to reach pre-pandemic levels, prices will likely follow.
WEATHER MAY UPSET BUMPER HARVEST EXPECTATIONS
The WASDE estimate assumes stable weather conditions as well as demand assumptions regarding China.
Weather conditions play a huge role in final harvested yield. In the current year, drought conditions & intense heat in Argentina led to lower crop yields. With extreme weather events rising globally, it is possible that unfavorable weather may reduce the final US corn output.
China is the largest consumer of corn. With hopes of strong economic recovery still simmering, demand in China may spike higher than USDA expectations.
If supply fails or demand spikes, Corn prices may remain steady or even rise.
Asset Managers and Options Markets are positioning for Corn price to plunge
CFTC’s Commitment of Traders Report shows that asset managers have more than doubled their net short positioning in Corn futures over the last twelve (12) weeks.
Other reportable traders have reduced their net long positioning by almost 50% in the same period. Both indicate rising bearishness about corn prices.
Similar sentiment is reflected in the options market. Although June and July contracts have Put/Call ratio of ~0.85 (more calls than puts), this is before the bumper harvest is expected (August-October). The September and December contracts which expire after the harvest have a Put/Call ratio of ~1.2.
The futures forward curve, which is in backwardation, also shows expectations for prices to drop following the harvest.
TRADE SETUP
Each lot of CME Corn Futures provides exposure to 5,000 bushels of corn. A short position in CME Corn Futures expiring in July (ZCN2023) with an entry of 586.25 and a target of 433.25, which is hedged by a stop loss at 654.25, is likely to yield a reward-to-risk ratio of 2.25x.
• Entry: 586.25 ¢/bushel
• Target: 433.25 ¢/bushel
• Stop: 654.25 ¢/bushel
• Profit at Target: USD 7,650
• Loss at Stop: USD 3,400
• Reward-to-risk: 2.25x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
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