Corn – Commodity

Instrument description

Corn is a popular agricultural crop and regarded as a soft commodity like other agricultural products such as coffee, cotton, wheat, and rice. Corn is also known as maize and cereal grain that is a native farming product in Central America. Corn is a vital food product consumed by millions of people all over the world. Corn is also consumed by animals and it is also an essential ingredient in the production of fuel.

Corn is not only a major food item for people but a staple product for the livestock feed. There are six different varieties of corn, namely sweetcorn, popcorn, flour corn, flint corn, pod corn, and dent corn. The wide uses or purposes that the corn serves are

• Corn contributes to more than 90% of livestock feed production in the United States
• Corn is one of the main ingredients to produce ethanol which is used as a fuel and also in making perfumes and varnishes
• The corn starch is used as a sweetener in ketchup, soft drinks, and candies. The corn starch is also used to thicken the sauce while preparing meals
• The breakfast cereals that many people enjoy eating contain corn
• Nearly all the movie watchers in cinema and home always keep a bowl of popcorn with themselves
• Some of the spirits and whiskeys are made using corn
• Corn is also found in batteries, deodorants, crayons, plastics, carpets, diapers, and matchsticks

Corn is widely grown all across the world with the U.S as the global leader and nearly two-thirds of the corn produced in the U.S is used domestically in providing feed to livestock and also as an ethanol fuel. The top five corn producing countries according to million metric tons are

1. United States – 377.5
2. China – 225
3. Brazil – 83
4. Argentina – 46
5. India – 42

Corn is used for diverse applications and has a huge industrial demand. The annual production of corn is said to even exceed that of rice and wheat. Therefore, corn plays a crucial role in determining the status of the world economy.

History of Corn

The farmers in ancient times used to grow and domesticate corn 10000 years ago in the region, which is said to be modern-day southern Mexico. But the European countries get to know about the crop in 1492 when Christopher Columbus got it from Cuba.

Corn is grown on the surface of the ground and it is part of the grass family. Corn easily grows in different regions and climates of the world. All six types of corn grow in the same manner. The farmers usually deposit the seeds in 1 or 2 inches of soil, and the seeds develop within a week to 12 days. However, the quality and temperature of the soil are crucial to determine when the seeds will fully grow. As the seeds germinate, little leaves also start to develop, and after further growth, the plants are easily noticeable with thick stalks and flat leaves. The corn stalks can grow as tall as 15 feet.

Once the stalks are two-thirds of their maximum height, the reproduction is done through wind pollination. The farmers plant the seeds close to each other to ensure proper fertilization. The harvesting timing significantly impacts the taste of corn. The corn harvested in the early or milk stage is known by its sweetness, while the corn harvested in the later or dough stage is known by its starchy content.

The planting and harvesting season of corn depends on the location of the region and the prevailing climatic conditions. In the U.S, the corn is mostly grown in the plains of the Midwest, where planting takes place in April and June, and harvesting occurs in October and November. The southern regions plant early due to favorable climate while those in the north wait for the snow to melt.

Corn is one of the few crops that can be rotated with other crops such as soybeans, and farmers can decide which crop to grow. The corn-soybean spread is a popular one for farmers, and the spread denotes how many bushels are needed to buy one bushel of soybean. If the ratio of spread is 2.2 to 1, then corn is expensive, and if the ratio is 2.4 to 1, then soybean is expensive.

The corn market is open for trading all year long like other commodities, but as corn is a seasonal product, the high trading of corn is mostly done in the summers. Corn is distributed in winter, and summer is for estimating the growth value. The most important report regarding corn is the United States Department of Agriculture (USDA) which is released in March every year. The report tells the acres planted by farmers and how it will impact the corn prices.

Supply and Demand of Corn

In the global market, the price of corn or any other commodity is determined by the supply and demand for that particular commodity. The price of corn is primarily determined by the supply and demand for corn. The imbalance in the supply and demand results in price volatility. According to statistics, the global demand for corn has increased over the years and will continue to do so because of developing economies.

In the U.S, the actual production of corn depends on the size or number of acres planted. As the U.S itself needs and utilizes corn the factors that play a part in supply and demand of corn are the use of corn as livestock feed, corn usage in ethanol production and export needs

How to read the price change of Corn

The price of corn is quoted in USD/BU, where USD stands for U.S Dollar, and BU stands for Bushels. One metric ton equals to 39.3683 Bushels.

If we examine the Corn Future Contact chart, we see the Index trades from $350/BU to $400/BU from September 2019 to February 2020. The highest Corn value recorded was $393.032/BU on January 23, 2020, and the lowest value recorded was $308.822/BU on April 28, 2020. After seeing a Bearish trend from March 2020, the corn prices are seeing a Bullish trend and currently trade at $354.230/BU. The Bid price is $354.230/BU, while the Ask price is $$$353.280/BU.

How to Trade Corn

Trading is corn is can be usedin diversifying your portfolio, hedging against inflation, and taking advantage of market volatility. There are five ways to invest in corn, which includes Exchange Traded Funds (ETFs), Derivative instruments such as (Futures, Options, and Contract for Difference (CFD) and buying shares of corn. The corn prices are quoted in USD and trading hours 00:00-12:44 and 13:30-18:19 (GMT).

The corn Futures contract trades on the Chicago Mercantile Exchange (CME), and you can get a contract of 127 metric tons of yellow corn. The corn trades on CME Globex electronic trading platform and the contract months are March, May, July, September, and December. In a Futures contract, traders mostly placed leveraged bets on corn prices, and if the corn prices fall, then traders have to pay an additional amount to keep their trading position. On the contract expiration dates, the contracts of corn are settled by the delivery of corn. Using Futures contract can be tricky and comes with certain risk as traders have to consider interest rates and storage costs.

Another way is to trade corn is using CFD, which is also a contract that allows traders to use leverage and speculate the price difference of underlying assets. The CFD gives benefits of using leverage, no physical buying or storing of corn, and trading in both upward and downward movement of prices. With CFDs, there is an equal chance of profit and loss, but a risk management tool maybeused.

There are no global companies involved in direct buying and selling of corn; however, traders can buy shares of companies that sell seeds and fertilizers to farmers such as Monsanto, Nutrien, and Mosaic.

What causes the price change of Corn?

The price of corn not only depends on the supply and demand of corn but also on the price of other top agricultural products such as wheat and barley. The economic factors that affect the price of corn are

• Crude oil prices

Corn is used to make fuels such as ethanol; the oil prices do affect the price of corn. An increase in prices of crude oil will also cause a rise in demand for biofuels as people will consider alternative fuel when gasoline price rises.

• Ethanol market

Corn plays a significant role in the production of ethanol, so a rise in the consumption of ethanol impacts corn prices. The U.S government also subsidizes corn for farmers so that it can boost ethanol production. The farmers also make the decision to grow the crops based on subsidies. When the ethanol demand falls, then there is an excess supply of corn, which will decrease the prices of corn.

• Value of U.S Dollar

U.S Dollar is recognized as the reserve currency, and the value of Dollar is closely related to the prices of many commodities, including oil and gold. When the price of USD falls against other currencies, then it will take more USD to buy corn. The corn distributors get fewer Dollars when the value of USD is high and get more Dollars when USD is weak. As the U.S is a global corn producer, so corn will always be quoted in USD.

• Chinese demand

China has the fastest growing economy and needs oil and other energy sources to fulfill its demand. The energy needs of China will grow considerably, and China is looking for environmentally friendly fuels such as biofuels. A crisis in the Chinese economy can impact corn prices.

• Climate

The growing concern of global warming is changing weather patterns all over the world and, consequently, on the production cycle of agricultural crops. Long periods of hot temperatures affect the yield of corn and increase the prices. The corn traders need to follow the weather patterns to form a suitable trading strategy and correctly speculate on the corn prices.

The global political news and events, trade agreements, and domestic interest rates and inflation also influence the prices of corn.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.