4 Reasons Corn Looks Bullish In 2018

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About: Teucrium Corn ETF (CORN), Includes: ADZ, AGA, AGF, DAG, DBA, DIRT, FUD, JJA, RJA, TAGS, UAG, USAG
by: Andrew Hecht
Summary

A bullish pattern in corn.

Reason one: Technicals looking good.

Reason two: The corn-soybean ratio supports corn.

Reason three: Gasoline is bullish for corn.

Reason four: Mother Nature can be very fickle.

The 2018 planting season across the fertile plains of the United States is just getting underway. Over the past five years, the weather conditions created abundant crops, and the memories of the drought of 2012 have faded into the market's rearview mirror. In 2012, the price of corn traded to a modern-day high at $8.4375 per bushel.

Today, corn is trading at less than half that price, and July CBOT corn futures were at just under the $3.90 per bushel level on April 24.

The 2018 crop year is beginning on a bullish note, as drought conditions in Argentina caused weak crop output in both beans and corn. While inventories remain at close to record levels after a half-decade of overabundant production, there is no guaranty that 2018 will be the sixth consecutive year where the world does not have to worry about grain shortages or rising prices because of limited output.

Even though the price of corn has been moving lower for the past five years, the impact of demographic-based demand has developed into a pattern of higher lows in the corn futures market since the turn of this century. The ever-increasing global population has increased the demand for all agricultural commodities, and corn is no exception.

A bullish pattern in corn

During the first quarter of 2018, the world added around 19 million people to the total population. In 2000, the total number of people in the world stood at around six billion, and today the number is 7.469 billion, an increase of 24.5% in eighteen years. More people with rising wealth around the world means that competition for finite raw materials is increasing. When it comes to staple commodities like corn, we have become addicted to bumper crops, and any shortage could shock the system and cause prices to explode to the upside.

Source: CQG

As the quarterly chart highlights, the price of corn traded at a low of $1.74 per bushel in the third quarter of 2000 and had not traded at that price again. Moreover, the lows have gotten higher as have the highs when it comes to the price of corn in the new millennium. The trading pattern in the corn futures market exhibits an upward price bias.

There are four reasons why I believe the price of corn looks particularly explosive this year as we enter the planting season. The first is that the technical state of the market over the past eighteen years has built a bullish case for the grain.

Reason one: Technicals looking good

The quarterly chart contains several bullish signs along with the price pattern of higher lows and highs over the past two decades.

Price momentum on the long-term chart shifted to the upside in late 2016, and the slow stochastic is telling us that the path of least resistance for the price of corn is higher. At the same time, volume and open interest have been rising with the price of corn over recent years. When the number of open long and short positions in a futures market and volume move higher during a bullish price trend, it typically validates the strength of the trend.

Source: CQG

As the weekly corn chart illustrates, the price of the grain has been making higher lows and higher highs since August 2016 when the price fell to just above the $3 per bushel level and held. The last time we saw a price below the $3 per bushel level was way back in 2009. Despite record production and inventories since the 2012 drought, the price of corn has held steady which is a reflection of increasing global demand for the agricultural commodity. The technical picture for the CBOT corn futures market remains positive and bullish going into the 2018 crop year in the United States.

Reason two: The corn-soybean ratio supports corn

The U.S. is the world's leading producer and exporter of both corn and soybeans. Each year, farmers across the fertile American plains decide which crop to plant in their soil. The decision is often purely economic as farmers are in business to make a return on their investment which is their acreage. Many farmers can choose between corn and beans each year, and they tend to plant more of the crop that offers optimal financial rewards based on new crop prices.

The median level of the corn-soybean ratio since 1968 is around 2.4:1 or 2.4 bushels of corn value in each bushel of soybean value. When the ratio is below the 2.4:1 level on new crop futures contracts, farmers tend to favor corn over bean planting as corn offers a better return. However, when the ratio is above the median level, they tend to plant more soybeans and less corn. The impact of favoring the grain over the oilseed or vice versa can result in a shortage of the product when farmers plant less.

This year, the ratio favors bean planting which is likely to result in less corn output.

Source: CQG

As the chart of the prices of November soybeans divided by December corn futures shows, the level of the 2018 new crop ratio currently stands at 2.53:1 and has been above the 2.4:1 level since last August at the end of the 2017 growing season. Therefore, farmers are likely to plant more beans than corn this year which means that consistently rising demand could push the price of corn higher, especially if the weather does not cooperate with corn and all agricultural crop production over coming months. Meanwhile, the ratio is telling us that less corn planting is likely to provide support for the price of the grain over coming months.

Reason three: Gasoline is bullish for corn

In the United States, corn is the primary ingredient in the production of ethanol, a biofuel. The ethanol mandate requires that refiners blend corn-based ethanol with gasoline in fuels for automobiles. Therefore, each time you stop to fill up your tank with gasoline, you are also consuming corn.

Source: CQG

As we head into the 2018 driving season, which is the peak season of demand for gasoline, the trend in the energy product has been positive since February 2016. At the lows in early 2016, the price of wholesale gasoline futures found a bottom at $0.8975 per gallon. After making higher lows and higher highs for over two years, the price of gasoline was trading at just under the $2.10 per gallon level on Tuesday, April 24. The price of gasoline is close to its high, and the trend is supportive of further gains as we enter the peak season for the energy product. Strong gasoline prices filter through and provide support for ethanol and its main ingredient, corn.

Reason four: Mother Nature can be very fickle

The final reason for a bullish outlook for the coming crop year when it comes to corn is the uncertainty of the weather each year. Just because Mother Nature provided ideal growing conditions over the past half-decade, does not mean that 2018 will be the same. A quick look back to 2012 provides an example of what a curve-ball from Mother Nature can do to the prices of agricultural commodities in a world where demand is ever increasing.

I believe that all of the reasons mentioned above combine to create a compelling case that limits the downside when it comes to the price of corn. At the same time, the fundamental and technical position of the market could create explosive price action if the 2018 crop disappoints and comes in lower than projections.

Therefore, risk-reward favors long positions in the corn market at current prices. For those who do not dip their toes into the leveraged and volatile world of futures and futures options markets, the Teucrium family of agricultural ETF products offers a corn vehicle. The symbol is not easy to forget as CORN has net assets of over $71 million and trades an average of around 84,000 shares each day.

Source: Barchart

As the chart dating back to 2010 shows, CORN has traded in a range from $16.53 to $52.71 over the period. On Tuesday, April 24 CORN was trading close to the lows at $17.72 per share. As we head into the critical growing season for corn over coming weeks, this could be the perfect time to add some CORN to your portfolio. The risk-reward ratio of the ETF product at its current price is highly attractive given the uncertainty if weather conditions over coming weeks and months which could prove explosive for the price of corn.

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.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.