Tips for Trading Corn Futures

Tips for Trading Corn Futures

The Key to Trading Corn Futures

Trading corn futures is similar to corn farming; they both must pay close attention to the seasons and the weather. Futures are standardised exchange-traded contracts in which a contract buyer agrees to buy a specific amount of corn from a seller at a fixed price on a future delivery date.

Producers and consumers of corn can manage risks in corn prices by buying and selling futures. Those who produce the corn can make use of a short hedge to lock in a selling price for their corn, while businesses that need corn can make use of a long hedge to secure a purchase price for the products they need. 

Corn futures are also traded by speculators who shoulder the risk that hedgers try to avoid in return for a chance to make a profit from gainful corn price movements. These speculators take it upon themselves to buy these futures when they believe that the price of corn will go up. However, they sell the futures when they believe that the price of corn will fall.

Buying Futures to Profit from a Rise in Corn Prices – Going Long

If you are bullish on corn, you can make a profit from a rise in the price of corn just by taking up a long position in the futures market. This can be done by buying one or more corn futures contracts at a futures exchange.

Selling Futures to Profit from a Rise in Corn Prices – Going Short

If you are bearish on corn, you can make a profit from a fall in the price of corn by taking up a short position in the futures market. This can be done by selling one or more corn futures contracts at a futures exchange.

Hedging Against Rising Corn Prices Using Corn Futures

Businesses that need to buy substantial amounts of corn can hedge against the rise in corn prices by taking a position in the corn futures market. These companies can employ the long hedge strategy to secure the purchase price for a supply of corn that would be required sometime in the future. For the implementation of the long hedge, sufficient futures should be purchased to cover the amount of corn needed for the business.

Example of Corn Futures Hedging

Companies producing ethanol would need up to 6,000 tons of corn within three months. The usual spot price for corn is £110.33/ton, while the price for corn futures for delivery within three months is £110.97. To hedge against a rise in the price of corn, the ethanol producer decides to lock in a future purchase price of £110.97/ton by taking a long position in an appropriate number of futures contracts. With each futures contract covering 50 tons of corn, the company producing the ethanol would be required to go long on 120 futures contracts to implement the hedge. 

The effect of putting the hedge in place should guarantee that the company would be able to purchase 6,000 tons of corn at £110.97/ton, which would amount to £655,820. Let us look at the scenario of things when the price of corn makes a significant move either downwards or upwards by the delivery date.

First Scenario: Corn Spot Price Rose by 5% to £116.5 on the Delivery Date

With the increase in the price of corn to £116.5/ton, the company would now need to pay £699,000 for 6,000 tons of corn. However, the increased purchase price would be offset by gains in the futures market.

When the delivery date comes, the price of the corn futures will have converged with the spot price of the corn, which is £116.5 /ton. As the long futures position was entered at a lower price of £110.33/ton, the company would have profited £116.5 – £110.33/ton = £6.17 per ton. With a total of 120 contracts covering up to 6,000 tons of corn, the total profit from the long futures position is £43,180.

Eventually, the increased purchase price is counterbalanced by the gain in the corn futures market resulting in a net payment of £699,000 – £43,180 = £655,820. This is equivalent to the amount payable when the corn is bought at £110.97/ton.

Second Scenario: Corn Spot Price Fell by 5% to £99.3/ton on the Delivery Date

With the spot price going down to £99.3/ton, the ethanol company would need to pay £595,800 for the corn. However, the loss in the futures market will offset any savings made. At the time of delivery, the corn futures price would be equal to £99.3/ton. Entering the long position at £110.33 gives a loss of £110.33 – £99.3 = £11.03 per ton. With the use of 120 contracts to cover a total of 6,000 tons, the total loss from the long futures position is £60,020.

As a result, the savings realised from this and the reduced price for the commodity would be offset by the loss in the corn futures market, leaving the  net payable amount at £595,800 + £60,020 =£655,820. This is equivalent to the initial price of selling at £110.97/ton.

Reward/Risk Trade-off

As we have highlighted using the example above, the negative side of the long hedge is that the company buying the corn would be better off without the long hedge as the price of corn would have eventually fallen. An alternative way to hedge against corn prices that are rising while still being able to benefit from a fall in the price of corn would be to buy corn call options.

Other Factors That Need to be Considered

Planting Intentions Report

In spring, the USDA’s planting intentions report starts the planting season for traders. The report is released by March every season. This report is a factor that sets the tone for the market and the season. It reveals the amount of land that farmers would need to plant their crops. The bigger the amount of land, the higher the chances are of a greater yield during the harvest. When conducting analysis, traders would take the number of acres and multiply it by a trend yield to obtain the season’s expected crop size and project the entire size of the crop for the season.

The other aspect of the futures variation is demand. As highlighted earlier, the majority of corn crops are allocated to the production of ethanol with the remainder used for the feeding of livestock, such as chickens, pigs, cattle, and other animal protein. This information might be surprising because only a small amount of the corn produced is used for human consumption. So, to understand demand, it is important to monitor the price of gasoline and crude oil, which determine the high demand for ethanol. A cheap corn price while the price of crude oil is high can increase the demand for ethanol.

The USDA Report

Every Thursday, the USDA releases an export report, which highlights the details of demand for corn exports. Corn prices move higher with strong export markets, which means it is advisable to monitor the price of corn from the exporting countries. If the price of corn in the UK is higher than that of other competing countries, there would be a slight reduction in the chance of a strong export market.

Corn futures take another dimension in the summer months as the high price of corn is set in late July or August. This is due to poor weather conditions, which occur during the height of the growing season when crops are most exposed. The biggest fears for farmers and traders are drought and extreme heat, conditions that can damage the harvest.

The World’s Biggest Corn Producers

The list of corn-producing countries is detrimental to planning the amount of corn you buy as well as setting a long haul in terms of weather conditions and other things that affect corn prices. Production data for 2018–2019 has helped us to generate a list of major corn-producing nations. 

  1. United States 

The United States is by far the biggest producer and exporter of corn with a production tag of 366.6 million metric tons. In the US, the amount of land dedicated to planting corn changes with the seasons but, generally, covers more than 90 million acres of land. Domestic consumption was approximately half of the total production, of which the majority was used to feed livestock. 

2. China

The current production rate of corn in China is estimated at 257.7 million metric tons. Interestingly, compared to its American counterparts, the majority of corn in China is consumed domestically. The production rate in China is set to decline as the government has ended price support on domestic corn.

As a result, corn farmers can be expected to switch to higher-value crops over time. If the demand for corn remains high without enough supply to meet demand, China may be forced to increase corn imports.

3. Brazil

This North-American country is a major producer of many crops, including soybeans, sugar, and coffee, and is the third-largest corn-producing country in the world. Just like China, Brazil produces approximately 94.5 metric tons of corn every year, with the majority consumed domestically

4. Argentina

Argentina is a big producer and exporter of corn. The country has an estimated corn production rate of about 46 million metric tons with a very low domestic consumption rate. Looking at the consumption rate in the country, it is clear that export covers for more than half of its production.

5. Ukraine

The Ukraine produces approximately 35.5 million tons of corn. This was possible due to the availability of fertile soil, which has helped improve the rate of production over time.

6. India

India is a corn-producing country that has tried to remain so for a very long time due to its economic stability. Although India is not at the top of the list of countries, it is slowly moving up the ranks with about 26 million metric tons per year.

The Largest Corn Producing States

When corn goes through the final pollination stage around late July, it requires moderate temperatures and moisture to ensure a high yield and healthy crops. Dry soil and extreme heat conditions produce low yields and a consequent rise in corn prices, which remain consistent from one year to the next.

Regarding bad weather reports, places to be aware of include Ohio, Nebraska, Illinois, and Indiana as these are the largest corn-producing states and can alter the complexity of the corn market. Luckily, many of these bad weather conditions, under worst-case scenarios, cause little damage to crops. The high market movement is brief as it always drops once the fear that the crops will be damaged has subsided. The best time to look for selling opportunities is during the summer months on price rallies.

How the Market is Affected by Problems Related to Corn Crops

Now and then, the fear of crop damage results in price increases that can be volatile. During late 2011, a drought took the price of corn to an all-time high. Here, we are trying to highlight that corn tends to hit peaks during late June and this can push the peak prices even higher. However, demand tends to fall when prices rise to an extreme. The market has to find a price that will stifle demand and ration supplies.

By contrast, corn prices often become low during harvest times. The harvest takes place when the largest supplies are available due to many corn farmers selling their cash crops.

Bottom Line

Purchasing corn futures is a business that requires a lot of information, and with the information included here, you can make the right decision with regards to your futures investments. 

The content provided here should not, under any circumstances, be taken as financial advice of any sort. The information here has been well researched and is certified to be true. However, any financial advice should be sought from your financial advisor based on your personal circumstances.

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