Todd's Take

15 Mar 2017

By Todd Hultman
DTN Analyst

In case you missed last week's article, "Lessons From Crude Oil," the short version is that too much focus on ending stocks can be deceiving because prices respond more to the movement of supplies being added to or subtracted from the market -- even when total supplies are considered high.

Last week's discussion centered mainly on year-to-year changes in grain supplies, but within each year, there are also times when supplies are either being added to or pulled out of storage. I'm a little embarrassed to admit that last week's lesson gave me a new appreciation for grains' seasonal influences.

Don't get me wrong -- I have long known that seasonal influence is important and paying attention to the seasonal index is part of DTN's Six Factors Market Strategies*. But I am guessing a lot of us pay less attention to seasonal patterns than the details of USDA's latest WASDE report. Grains' seasonal influence deserves more respect.

Using historical data of DTN's national index of cash corn prices (NCI.X), which goes back to 1993, I constructed a simple comparison of two scenarios. The first scenario shows a theoretical gain of $1.19 a bushel for owning corn perpetually from 1993 to the end of 2016.

Like me, you might be saying that $1.19 doesn't sound like much over 24 years and you're right. It represents a compounded rate of return of about 2.0% on the original price of $1.96 a bushel. We have to admit owning corn perpetually has not been a good investment.

The second scenario applied one simple change based on corn's seasonal pattern. Instead of owning corn 12 months a year, what if corn were only held from Nov. 30 to May 31 of the following year?

To be fair, I can be accused of cheating here as we already know from corn's 10-year seasonal average that the low falls on Oct. 2 and the high on June 14. Why use Nov. 30 and May 31?

Going back to last week's lesson, I wanted to use two dates that we would likely guess even if we didn't have the benefit of knowing corn's 10-year seasonal average. In terms of supplies, the U.S. corn harvest is mostly over and its size well-guessed by Nov. 30.

Once early sales are made and the rest of corn is stored away, buyers have to bid up to pull supplies out of the market. In 1993, U.S. producers had little competition for selling corn until July when weather at pollination time would tip off the size of the next harvest. In more recent times, South America's production has become more competitive.

Argentina's corn exports now typically pick up in March, but the bigger threat to prices emerges in July when Brazil's second crop adds to Argentina's export totals. May 31 seems a safe date for avoiding the bearish triple threat of South American exports, corn's pollination weather, and USDA's June 30 acreage estimate.

So how did owning cash corn go when confined to only those six months? Much better. Instead of gaining $1.19 a bushel for holding corn perpetually, anyone that limited their holding period from Nov. 30 to the following May 31 gained $8.40 a bushel over the same 24-year period.

The lessons here are valuable for producers and anyone who trades in corn. First, the $8.40 total gain is a big improvement, but be aware that it comes to 5.8 cents a bushel per month held over the entire 24 years. Storage costs would eat up much of that gain and need to be watched carefully.

The other side of the coin may be even more important. The $8.40 gain from owning corn in the six months after harvest means that prices lost $7.21 a bushel over the other six months, plus storage costs, plus interest. It has been financially dangerous to own cash corn from June to the end of November.

As an analyst, I am encouraged to see this seasonal tendency in corn holds up as a perennial feature, very much related to the fundamental way markets work that I described in last week's article. Because of that, last week's new eight-week low in May corn should not be viewed as bearish, as if it happened in June or July.

Comparing the two equity paths, it is impressive that corn's changes in equity are not only more profitable when using the seasonal rule, but also far less volatile than year-round corn prices. The seasonal rule would score well among quantitative analysts, which may explain why we have seen more noncommercial buying in post-harvest months in recent years.

I realize the topic of seasonal influence in grains is old hat for many, but it's important to know that it's not just an empirical coincidence. This week's simple study shows significant differences in corn's price behavior, depending on the time of year, and is likely related to the flow of supplies. Ignoring these seasonal differences would be an expensive mistake.

* Learn more about DTN's Six Factors Market Strategies at: http://about.dtnpf.com/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

(ES/BAS)