Corn Has Fallen Too Low Too Early

| About: Teucrium Corn (CORN)

Summary

Technical analysis reveals the attractiveness of the speculative buying of corn.

Exports show significant improvement.

Ethanol production grows.

The current soybean price indicates an underestimation of the value of corn.

From the point of view of technical analysis, now is a good time to open speculative long positions on corn. The fundamental analysis also allows to assume that corn is undervalued at this point in time.

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Firstly, the reversal documented on the corn futures market on June 24 identified the rising line of resistance, that price was unable to break through after two consecutive trading days. The availability of a tested support is a key prerequisite for the formation of the bull market.

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Secondly, despite the massive selloff on the corn and soybean market in the past week, the funds still hold record long positions on these cultures. It is unlikely that the market will collapse without significant participation of the money managers in the process.

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Source: Saxo Group

Thirdly, the consumption of corn in the United States can be divided into three components: export, ethanol production and feed consumption. The current analysis of all those elements confirms the high demand for corn.

As of the third week of June, due to sharply increased activity of the exporters, the United States have already secured 100% fulfillment of the export plan, according to the USDA. And the outstanding sales of the next marketing year exceeded the average of the past five years. This almost certainly means the corresponding adjustments in the July USDA forecast and the shift of the projected balance on the corn market to the demand side. But it also means the attractiveness of the American corn on the international market even before the price collapsed last week.

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Ethanol production in the United States has outpaced the past marketing year. The key driver is the increased margin of ethanol producers. According to the EIA, as of 17 June the cumulative production of ethanol totaled 40.733 million barrels since September 2015 - almost one million barrels more than in the previous period. In the meantime, the current stock of ethanol exceeds last year's indicator by only 400 thousand barrels.

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Source: Farm Futures

Soybean and corn prices are naturally correlated because they are raw materials for animal feed. At that, since the beginning of this year, the soybean price has risen by 25% on average and corn price only by 5%. In the meantime, the soybean market does not create the impression of a market that has already shown everything it was capable of and this "bullish" impulse should be partially communicated to corn.

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The corn market is always a "weather" one, and at least the experience of both 2011 and 2013 indicates that the relatively good condition of crops does not guarantee a good final harvest. There is still a long way to ripening, and the current price decline on the corn market looks premature against this background. Click to enlarge

I believe it's quite a good time now to buy call options on September corn futures. The current market target - $ 4.20.

Unless otherwise noted, all charts included are my own.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.