This is my personal study notes for agricultural commodities.
Refence book: Dunsby, Adam, John Eckstein, Jess Gaspar, and Sarah Mulholland. Commodity investing: maximizing returns through fundamental analysis. John Wiley & Sons, 2008.
Production
Corn started as a primary food source for humans, but today it’s mainly used as animal feed.
Worldwide production of corn is dominated by the United States.
Then followed by China
Corn production depends on two things—acreage harvested and yield per acre.
Some planted acreage may not be harvested due to poor performance of the crop, pest infestation, or extreme weather events that would destroy the crop.
On average in the United States since 1980, 10 percent of the acreage planted for corn was not harvested.
The yield per acre keeps rising as a result of technological advances in farm machinery, fertilizer, and genetically modified seed, among other things.
The volatility in yield occurs because the crop is vulnerable to stress during the tasseling and pollination stages.
In the United States, these two stages occur between the middle of July through August.
The two common stressors for agricultural plants are drought and heat.
Excess moisture during the harvest can result in puddles in the fields, and as a result machinery can’t get into the fields to harvest the crop.
This causes the mature crop to sit in the field longer, exposing it to mold and mildew along with changing weather towards the winter season.
In the United States, the corn marketing year starts in September and ends in August.
This is because the new corn crop would begin to be marketed starting in September as harvest begins.
Consumption
Worldwide corn consumption is highest in the United States and is followed by China, the European Union, Brazil, and Mexico.
Demand for corn is dominated by its use in livestock feed for animals such as cattle, hogs, and poultry.
In some countries, corn is a staple for human consumption.
Corn is also utilized in starch form in consumer and industrial products.
Corn has been grabbing headlines since 2005 for its use as a fuel in the form of ethanol.
Current research is focused on producing ethanol from cellulose-based products such as farm waste, wood chips, and switch grass.
As a percentage of total demand ethanol now consumes more corn than that used in the food and industrial sectors.
The corn market does compete with other grains for use in the feed sector.
Other feed grains available to livestock producers are sorghum, barley, and oats.
Corn also competes with sugar for its use in the sweetener market, especially in soft drinks.
Storage and Cost of Carry
Grains are largely stored in grain elevators located near major rivers and ports for shipping.
In the United States, the Mississippi River and its tributaries are commonly used for grain shipments.
In the grain market, the supply comes all at harvest whereas demand is spread throughout the year.
This creates supply in excess of immediate consumption.
Cost of storage
cost = (cost of near future ∗ (Interest/360) + daily storage cost) * days in storage
Full carry is when the price difference between two different future months equals the full cost of carrying the commodity from the delivery month of the first contract to the next.
One reason the market is less than 100 percent full carry is that it is extremely difficult to go short the physical corn.
In addition, even if the arbitrager were able to short the physical corn, he would not receive the storage costs.
In the corn market, when the futures contracts are pricing in some percentage of full carry, as in the previous example, it is called a normal futures curve.
It is normal because this is how the futures curve is shaped most of the time in the grain markets.
This is also called contango, when the far future price is higher than the near future price.
An inverted curve shows a negative percent of full carry, suggesting that consumers are unwilling to pay the farmer part of the cost to store the corn for future consumption.
An inverted curve in the grain markets implies there may be a short-term shortage in the market and consumers would rather have the grain now than later.
Corn Futures
Different corn futures trade in many different countries. The most liquid corn future trades on the Chicago Board of Trade (CBOT).
The CBOT corn future has a contract size of 5,000 bushels.
It trades in cents/bushel and has a minimum tick size of 0.25 cents/bushel.
This tick size is equal to a value of $12.50.
That means if you own one futures contract at a price of 400.00 cents/bushel and you sell it at 400.25 cents/bushel, you have made $12.50, minus transaction costs.
The CBOT corn future contract trades futures months of December, March, May, and July for each marketing year.
For smaller investors the CBOT has an E-mini corn futures contract.
This contract is one-fifth of the size of the regular CBOT corn futures contract.
Each E-mini corn future has a contract size of 1,000 bushel, a tick size of 0.125 cents/bushel, and a tick value of $1.25.
The E-mini corn future can be physically delivered. The delivery specifications are the same as those on the full-size corn future.
Both the Tokyo Grain Exchange and the Dalian Commodity Exchange in China also trade fairly liquid corn future contracts.
Price History
Overall the price of corn stayed between 200 cents/bushel and 300 cents/bushel for most of this time period.
Why do the price spikes last for only a short time?
The answer is economics. Demand and Supply matter.
While this concept does hold to a small degree, there is also the issue of government subsidies to farmers.
The extra money that farmers receive from subsidies allows them to continue to plant corn each year regardless of how low the price is.
Government subsidies for corn come mainly in three forms
direct payments,
counter-cyclical payments, and
subsidized insurance.
Still, price spikes for corn do occur, and they are usually a result of poor crop yields due to weather.
The USDA publishes a variety of weekly, monthly, and yearly reports that are helpful in determining the fundamental picture of the corn market.
The USDA makes estimates for many categories including domestic demand, acreage harvested, crop yield, production, exports, and ending stock totals.
Possibly the most important publication from the USDA is the monthly World Agricultural Supply and Demand Estimates (WASDE).
Another USDA publication that is important for the corn market is the yearly Prospective Planting report published at the end of March.
