Corn Bulls Rejoice! I Believe Your Time Has Come.

Corn Futures have spent many years in the doldrums. It seems like there have been myriad opportunities when there might have been some underlying strength building over the years in the market. All to no avail. However, this might be changing at this juncture. When the stocks-to-use ratio of this market is at record low regions, we tend to see a fantastic long-term rally for at least 1-2 years.  

WHAT IS THE STOCKS-TO-USE RATIO?

The stocks-to-use ratio is a convenient measure of supply and demand interrelationships of commodities.  This ratio indicates the level of the year-end carryover stock for any given commodity as a percentage of total use of the commodity.  Here is a link if you want more info about the ratio.  

If you look at the DTN Progressive Farmer chart below, we saw the ratio hit a record low around 17% in 2003-2004, then we hit another one right around 15% in 2006-2007, then again around 14% in 2010-2011.

Stocks-to-Use Corn Ratio

Stocks-to-Use Corn Ratio

What happened to the Corn Futures price following these levels being triggered, one might ask?

WHERE HAVE CORN PRICES GONE IN THE PAST?

In 2003, we saw Corn Futures strengthen nicely, rallying from $2.50/bushel to over $3.00/bushel. Then, in 2006, we saw a monstrous multi-year rally through early 2008 from just above $2.00/bushel to $7.50/bushel. Then, in mid-2010, we saw Corn Futures surge from $3.50/bushel to $8.00/bushel in less than 12 months.

Corn Futures (Monthly)

Corn Futures (Monthly)

From 2015 to present-day, over 4 years now, we have essentially seen Corn Futures in a tight range, bouncing between $3.50/bushel to $4.00/bushel approximately. The corn price might be gearing up for a solid surge higher in price, especially since we are at ~11% in the stocks-to-use ratio, which is the lowest ratio in decades.

MORE BULLISH FUNDAMENTAL NEWS

Additionally, China has an ethanol mandate for 2020 that may help drive prices higher in the coming months.  Also, Morgan Stanley predicts a cyclical peak for the U.S. dollar, which their analysts estimate is ~15% overvalued against other major currencies.  This is generally bullish for commodities like corn as the greenback and commodities tend to be inversely correlated.

WHERE DO I THINK CORN PRICES ARE HEADED IN THE FUTURE?

We could be very close to capitulation in the coming weeks and I believe we might see an overall $2-$4 move higher in the coming months/year or two (which is still less than the 2006 and 2010 moves).  $2 is a $10,000 move per contract.    

I am firmly a corn bull as of today.

-Michael Hoeft

I am a 13-year veteran in the futures markets, having ran an Introducing Brokerage and a Commodity Trading Advisor.  I can be reached at mwhoeft@gmail.com to talk some shop, answers market questions, or to set you up with my free monthly newsletter.

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