The major (long-term) downtrend in corn that began in August 2012 seems to finally be coming to an end. As the monthly chart shows, the nearby futures contract continues to extend its rally off the January 2014 low of $4.06 1/4, sitting at $4.67 as March gets under way. The question is what has happened to turn the tide.
As always, let's begin with the noncommercial (investment, speculative, fund) side of the market. CFTC Commitment of Traders numbers (bottom study, blue histogram) show this group has moved from a net-short futures position of 115,220 contracts (end of October 2013) to a net-long of 126,170 contracts (end of February 2014).
But why would investors buy back into corn? A couple of reasons come to mind. First, the fall to near $4.00 put the futures market in the lower 25% of the five-year price distribution range. It could be argued this made corn seem undervalued, and with market volatility low (not shown, but roughly 12.5% in February) these traders viewed corn as a low risk buying opportunity.
More importantly, the fundamentals of the market grew more bullish. The nearby futures spread (third study, green line) has stabilized with the March to May priced at a carry of about 6 3/4 cents. However, with the March contract already in delivery, attention has turned to the May to July spread showing a carry of only 4 3/4 cents. This reflects a neutral to bullish 38% of total cost of carry.
By the end of March, monthly stochastics (second study) should also show a bullish crossover (blue line crossing above the red line with both below 20%) confirming the move to a major uptrend. If so, and given the neutral to bullish commercial outlook of the market, the long-term upside target would be $6.25. This price marks the 50% retracement level of the previous downtrend discussed above.
It should also be noted that this isn't just a change in direction for the futures market. The monthly chart for the DTN National Corn Index (national average cash price, not shown) shows a similar structure. After falling to a monthly low of $3.94 in February, a price in the lower 29% of the five-year price distribution range, the cash market began to firm. So much so that monthly stochastics are showing the same bullish crossover pattern in March, putting the long-term upside target near $6.10.
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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.