As DTN Markets Editor Katie Micik wrote about last week, the DTN National Corn Index (NCI.X, national average cash price) closed below $4.00 for the first time (weekly close only) since the week of August 23, 2010. The difference is during that time, the cash corn market was beginning a strong uptrend, continuing its climb from the early December 2008 low of $2.69.
Those familiar with my analysis know that one of ways I measure a market's strength or weakness is by price distribution. This shows the percent of time a market (cash, futures contract, etc.) closes the week above a certain price level over a set period of time. In DTN Strategies, the charts are based on the last five years of the futures markets. But for this look at the NCI.X, I decided to use a different approach.
The attached chart takes a look at the cash corn market since the beginning of the demand market for corn at the start of the 2005-2006 marketing year (August 2005). Why this particular marketing year? The Energy Policy Act of 2005 included an increase in the use of biofuels, most notably starting in 2006. At the same time, Chicago exchange rules were changed to allow for more investment in ag commodities, most notably corn, starting in 2006 as well. The latter opened the door or large global investors looking to take part in the newly legislated demand for corn, setting in motion the changed dynamics the market is still driven by today.
If we look closely at the attached chart we see that the $1.50 column on the far right hand side extends all the way up to 100%. That means since the beginning of the 2005-2006 marketing year, the NCI.X has closed above $1.50 100% of the time. Analysis of the data shows this to be the case, with the low weekly close of $1.55 occurring the week of October 24, 2005. Far off to the right hand side we see the $8.00 mark is near 0%. The data shows that since August 2005, the NCI.X has closed above this price level twice out of 461 weeks. The high close was $8.17 the week of July 16, 2012.
With the NCI.X priced below $4.00 last week, just ahead of the July 4th holiday weekend, where does that put the cash market in the longer-term price distribution range? The red column represents the most recent weekly settlement, putting the NCI.X at the 54% mark, meaning more than half of the weekly closes since August 2005 have been above this price (the actual midpoint, the yellow column, is at $4.10).
So what does this mean for the corn market in general? Remember that the cash value of any market, including corn, is its intrinsic value. That being the case, cash corn could soon be viewed as undervalued. However, things might not get interesting until the NCI.X drops into the lower third of the price distribution range, with the 66% mark at $3.50.
Given that basis (the difference between the NCI.X and the futures market) has been running at roughly 18 cents under, just below the demand market average of 15 cents under for early July.
If basis holds near average through the first quarter of the 2014-2015 marketing year (September, October, November), roughly 33 cents under the futures market, and the NCI.X possibly finding renewed buying interest near $3.50, then the potential price target for the December 2014 futures contract would be between $3.80 and $3.90.
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.