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Executive summary:

  • Coffee (NYSEARCA:JO) has jumped 20% since I advised investors to get long in my article Coffee Is Just Starting To Heat Up.
  • Corn (NYSEARCA:CORN), while following coffee's downtrend in 2013, will not follow coffee's historic rise to start 2014.
  • The Brazilian drought will have a minute effect on production.
  • The net short positions that existed in coffee, fail to exist in corn.
  • In the near-term, corn may rise due to a very bullish chart. _________________________________

Coffee Update

As stated above, coffee rose 20% since I highlighted the factors set to propel coffee higher. Today, I closed my remaining position in coffee. While I am no longer long the commodity, I do not advise investors to short coffee as any drought news sends it flying to the upside. The latest CFTC report shows that traders added to their coffee shorts after the move higher in late January. The charts I created below show how shorts increased their positions through the most recent report on February 14th.

It is important to note that coffee has moved over 22% since the February 14th CFTC report and that a fair amount of that move is likely due to shorts covering the positions they added to. In the next CFTC report on February 21st, this recent short covering will likely be confirmed. However, if the shorts have added to their positions once again, I advise investors to get long.

The Fantastical Corn Drought

The main catalyst behind coffee's original move higher was the drought in Brazil. While Brazil is the world's 3rd largest corn producer, Brazil only produces 10.3% of the world's corn. The United States, the world's largest producer of corn with 39.6% of global output, continues to produce at record levels. As reported by T. Marc Schober of Farmland Forecast, US corn production set a record high in 2013. Therefore, while the Brazilian drought will weigh on global production, any shortfalls in Brazilian production will not be significant enough to displace record production by the U.S.

Net-Long Traders

As touched on above, net short positions in coffee helped to send the commodity higher in a short covering rally. In corn, however, the situation is not the same. In fact, traders are net long corn. In the chart I created below using data from the CTFC, the net long positions of traders can be seen. (Contracts of 5000 bushels)As seen in the chart above, the majority of traders don't believe in a supply crunch. While some traders are short, and a short covering rally could occur, the incredible short covering rally seen in coffee won't occur in corn as most traders are long.

Bullish Corn Chart

As seen in the weekly chart below from stockcharts.com, corn looks very bullish from a technical perspective.

To start off, the RSI (Relative Strength Index), a momentum indicator that shows whether an asset is overbought or oversold, highlights increasing strength in the commodity. The Parabolic SAR, a second momentum indicator, recently lined up below the price indicating future bullish price action. The final momentum indicator, the MACD, recently made a bullish cross into positive territory. Lastly, the CMF (Chaikin Money Flow), a measure of whether money is flowing into or out of an asset, has been climbing higher and recently made a bullish move above zero.

Conclusion

Technicals are likely to send corn marginally higher in the short-term and investors should stay on the sidelines until the chart turns bearish. Once the chart turns bearish, corn will become a great short due to record supply levels and favorable weather for production. Investors can short corn by selling shares of the Teucrium Corn ETF or by purchasing put options. The ETF is weighted 35% to the second-to-expire CBOT (Chicago Board of Trade) futures contract, 30% to the third-to-expire CBOT futures contract, and 35% to the CBOT futures contract expiring in the December following the expiration month of the third-to-expire contract.

Source: Corn Will Not Be The Next Coffee