By Todd Hultman
DTN Analyst
Along with a new year comes the anticipation of what lies ahead, and for December corn prices, the early outlook is bearish. Coming off a record 15.23 billion bushel harvest, USDA is estimating 2.4 billion bushels of ending U.S. corn stocks for 2016-17 or 16% of annual use.
In addition to surplus corn in the U.S., competition is on the way with corn crops in Brazil and Argentina now reaching the southern equivalent of early July in their growing seasons. There are concerns about dry conditions in northeastern Brazil and southern Argentina, making estimates uncertain, but if USDA is close, Brazil and Argentina will harvest another 4.8 billion bushels in the months ahead.
The one thing that corn prices do have going for them right now is that much of the U.S. harvest has either been moved or stored away and Brazil's corn exports normally don't pick up until June or later. That gives corn prices a chance to hold steady or even possibly work a little higher in the next five months.
This seemed like a good time to look at how December corn prices have historically behaved from Jan. 1 until June 1 so we might know what to expect in 2017. Going back to 1980, the results have approximated a 50/50 proposition.
December corn closed higher in 20 of the 37 years examined, or 54% of the time. The largest gain was 32% in 2008 and the biggest loss was 19% in 2001 with an average gain of just over 1% for all 37 years. Even though the first five months of the year should typically be a less bearish time for corn prices, owning December corn futures through this time is shown as a slight advantage.
You might be thinking that some of corn's biggest moves were the result of drought or other weather problems that happened after June 1, and yes, it is true that corn prices have had big, memorable moves in the latter half of the year. Generally speaking, however, owning corn after June 1 has been a losing proposition.
Going back to 1980 once again, owning December corn from June 1 to December 1 resulted in a theoretical loss in 25 out of the 37 years or 68% of the time. The largest gain of 44% in 2012 was matched by a 44% loss in 2008 and also helped produce an average loss of 4% across all 37 years.
The danger of hanging on to corn too long is that we remember big, dramatic moves such as what happened in 2010 or 2012 and easily forget when weather was benign even though there were twice as many of those bearish years.
For corn producers, it is important to find a way to improve those odds, and that is one area where trend can help. There are many ways we could go about this, but consider one example of how a simple trend-based rule could improve the outcome.
Recall how owning December corn futures from Jan. 1 to June 1 resulted in a neutral result of 54% winners over the past 37 years. Now, instead of holding corn all that time, let's say a producer only allows long exposure if December corn trades above the high of the past two months (45 trading days) and then holds on until June 1. How does that change things?
You might think the results would be worse because the producer doesn't theoretically go long until corn makes a new high, but the outcome is actually better because of the losses that are avoided. Instead of 20 winners (54%) and 17 losers, using a new two-month high saw 10 years when the risk of being long was not exposed. The remaining 27 years when new highs were reached produced 16 winners (59%) and 11 losers.
It may not sound like much to hear that the average return was increased from 1.3% to 3.6%, but it is important to know the number of years when losses exceeded 10% were cut from seven to two. This two-month rule didn't turn every trade to gold, but it did change the playing field from neutral to positive outcomes -- an important goal for any business.
As we head into the new year, the high of December 2017 corn over the past two months has been $3.93 3/4. With corn supplies looking bearish for 2016-17, it is hard to imagine a bullish scenario anytime soon unless problems crop up in South America.
Instead of hanging on to last fall's corn and hoping for a sympathetic coin toss, consider using the trend of the market to determine when being exposed to risk makes sense. I can't guarantee where prices will go in 2017, but the math of the past 37 years suggests that the odds are better when we pay attention to trend.
Todd Hultman can be reached at todd.hultman@dtn.com
Follow Todd Hultman on Twitter @ToddHultman1
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