Let’s Keep This Cornfidential

  • SumoMe

A short while back I wrote about the seasonal tendency for soybeans to advance in price between early February and mid-June.  Well I hate to anger the commodity gods by something stupid like “So far, so good” but, well, oops, I just did.  As you can see in Figure 1, well, so far so good (now I’ve gone and done it).

0Figure 1 – Soybean futures

Well as it turns out – and probably to no one’s surprise, soybeans are not the only grain to show seasonal tendencies.  The corn market has a seasonal bias that is very similar to soybeans.

Who Knew that the Planting Cycle Could be So Interesting (and Useful)?

Before going any further it makes sense to ask the question “But why would there be a seasonal bias in the beans and corn?”  The answer involves a mix of the “planting schedule” and “human psychoses” (in this case more commonly known as “uncertainty”). In the U.S. the majority of corn and beans get planted in the early spring, grow during the summer and are harvested in fall.

What this means is that after harvest and until the next planting season there are no seeds in the ground until the following spring, i.e., there is uncertainty.  So during “off season” we grain traders talk a lot about the weather.  It’s not that we’re not good at making normal conversation, er, well never mind about that.  In any event, talking about the weather – and whether or not planting conditions will be favorable or unfavorable during the following spring is something we find very interesting (which is kind of sad come to think of it, but I digress).  But the bottom line is that when there are no seeds in the ground there clearly is uncertainty regarding the next season’s crop because during this particular period of time, well, there isn’t one to speak of.

When planting season rolls around farmers start to plant and grain market analysts can go out and check the condition of the fields (hey it beats sitting around talking about the weather some more) and make some educated estimates as to whether this year will yield a “bumper crop”, a “bummer crop” or something in between.  If things look really great grain prices may not perform all that well during the spring.  But again, because there is nothing actually growing and/or blooming there is uncertainty.  And if there are any signs of trouble at all grain prices can – and at times do – rise substantially during spring as the seeds go into the ground, take hold and begin to grow.

By summer time the plants are growing the grains are blossoming and driving through the State of Illinois with its endless rows of grain fields is almost unbearable (trust me on this one).  At this point the grain analysts can go back out into the fields (do these guys know how to have a great time or what?) and make an extremely well educated (Hey, Ag is too a Major!) estimate regarding the outlook for the current crop.  As you can probably guess by now, if things look bleak (drought, floods, etc.) grain prices can continue to rise.  But by summer time most of the “fear” buying has usually already been done.  So if things look OK, the “fear premium” tends to come out of grain prices and the prices for corn and beans can show some serious weakness.

And so it goes the next year and the next year and the year after that.

So What about Corn?

The incredibly helpful graph in Figure 2 displays the monthly gain for corn futures by month since December 1979.1 Figure 2 – Corn all Months (1979-2014)

OK, not exactly helpful when presented all on one chart.  So let’s break it down a little.  Figure 3 displays corn performance only during months October through April.2 Figure 3 – Corn October through April (1979-2014)

OK, still a whole lot of “squiggliness” going on.  So in Figure 4 let’s combine all of the lines that appear in Figure 3.3 Figure 4 – Corn October through April (1979-2014)

The chart in Figure 4 illustrates exactly what I wrote about above.  While the chart is far from an unbroken advance, the long-term trend is unmistakable. “Uncertainty” in the corn market typically occurs between the end of September and the end of the following April.

What About the Rest of the Year?   

I was hoping you would ask.  In Figure 5 you see the performance for corn futures during all months that do not include October through April.4 Figure 5 – Corn May through September

Anyone notice a trend? Once “uncertainty” is alleviated the “air (tends) to come out of the balloon.”

Alternatives

The implication of this article seems to be that we should all buy corn futures on September 30th, hold until the last day of the following April and then sell short and hold a short position until the end of September.  And here lies the paradox:  On paper this strategy would have performed very well over the past 35 years.  Unfortunately, it is also a strategy that is fraught with peril.  Holding a long or short position in any futures contract “no matter what” is a dangerous game to play.  Likewise – and I cannot emphasize this enough – these tendencies DO NOT work every year “like clockwork”.  Every once in awhile corn will fall hard during the October through April period and every once in awhile corn will spike sharply higher during the May through September period (Sorry, I don’t make the rules).

Still, there does seem to be “something” to the overall seasonal tendencies, so one approach to consider is to look for “buying opportunities” (using your own preferred trading methodology) between October and April and to look for shorting opportunities between May and September.

One alternative to corn futures is the Tecrium Corn Fund ETF (ticker CORN).  Using this ETF traders can buy and sell and sell short corn just as they would shares of stock.  Two words of warning:

1) Trading volume is fairly light so traders need to carefully assess the risks associated with trading in any serious size and/or selling short.

2) Buying and holding and/or selling short and holding for months on end is a risky strategy.

Again I would suggest using the seasonal tendency as a filter and look for opportunities to trade shorter-term in the direction of the dominant seasonal trend. For example, in Figure 6 you see ticker CORN when the 2-day RSI drops to about 16 from the end of September to the present. 5Figure 6 – Ticker CORN with 2-day RSI (Courtesy: AIQ TradingExpert)

Summary

I will be the first to (OK, grudgingly) admit that some seasonal trends don’t seem to have a lot of rhyme or reason to them.  But that is not the case with corn and soybeans.  It only makes sense that traders would generally be most anxious during the “off season” when seeds are either not in the ground or just getting planted or trying to grow.  And it makes sense that once “the news” is “out” (i.e., once it becomes clear how this season’s crop is likely to turn out) that traders would be less anxious.  As we saw in the charts, these tendencies are often (did I mention “BUT NOT ALWAYS!”) reflected with higher grain prices fall through spring and lower grain prices summer into fall.

And the beauty of this cycle with grains is that as long as the earth keeps turning the planting and growing seasons are not going to change anytime soon.

Jay Kaeppel

4 thoughts on “Let’s Keep This Cornfidential

  1. As crop insurance has played a bigger role and price being set off the months of February and October probably plays a part in this “lifting” tendancy

  2. Nothing spells “curve-fitting” more than an overly particular number like RSI 16. Why don’t you stick with a more common 20/80 or 30/70?

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