MW Why corn below $4 is similar to oil below $40
By Myra P. Saefong
Corn under $4 a bushel is a potential investment opportunity: Teucrium
Corn prices have dropped below $4 a bushel to their lowest levels in nearly four years on ample U.S. supplies, but their "shared history" with U.S. crude oil may offer the biggest clue on what they do next.
"It's important for investors to think about corn the way they think about oil," said Sal Gilbertie, chief investment officer at Teucrium Trading.
Corn and oil are both known as commodities, but that isn't the only thing they have in common. There have been some "really significant price patterns both corn and crude oil have repeated over the past two decades," Gilbertie said.
Corn prices (C00) (CZ24) have doubled from around $3.50 a bushel to over $7 three times since 2007, with every rally beginning from the $3.50 to $4 price area, which is widely thought to be the futures equivalent cost of production for U.S. farmers, he said.
Similarly, whenever U.S. benchmark West Texas Intermediate crude (CL.1) (CL00) falls much below the area of $40 to $50 a barrel, which the industry widely sees as at or below almost everyone's cost of production, prices tend to rally significantly - generally within a couple of years - often peaking at a price double that where the rally started, said Gilbertie.
This is a "remarkable shared history between corn and crude that almost no one acknowledges or even knows about," he said.
He noted that the never-before-seen drop in WTI oil prices to a negative $37.63 on April 20, 2020, was an "entirely separate aberration." That move was partly attributed to traders scrambling to exit long positions that would have required them to take physical delivery of crude at a time when storage space was limited.
Overall, "crude oil and corn have followed a remarkably similar pattern in both timing and price movement," Gilbertie said. That's why "corn below $4 is similar to oil below $40," suggesting the potential for an investment opportunity.
Now, after almost three years of elevated prices, corn is returning to its cost-of-production level, he said.
On Friday, the most-active December corn contract settled $3.921/2 a bushel in Chicago, after trading as low as $3.90. Those prices marked its lowest values since October 2020, according to Dow Jones Market Data.
On Monday, corn futures edged up to settle at $4.001/4 a bushel, but at the end of last week, they were trading nearly 17% lower year to date, after losing nearly 31% in 2023.
"This is a significant potential opportunity for investors - one that has occurred in the past in repeatable pattern[s] every few years," Gilbertie said.
'Golden grain cycle'
With corn entering a trading range near the cost of production, it has re-entered the first stage of a "time-tested cycle" that Teucrium refers to as the "golden grain cycle," according to late July commentary written by Jake Hanley, managing director and senior portfolio strategist at Teucrium, which offers the Teucrium Corn Fund CORN.
Stage 2 would be marked a price advance on the back of a supply and demand imbalance, and Stage 3 would see supplies build due to an increase in output and prices, leading to a fall in value for the commodity back toward the cost of production, he explained.
How long prices will remain in Stage 1 is uncertain, but "historically bull markets in corn are driven by a supply-demand imbalance," Hanley wrote. "Supply can be curtailed by adverse weather conditions, such as droughts, while prices can also react to external risk factors like global conflicts and trade policies."
Corn and oil follow 'simple rules'
Gilbertie said that when markets are well supplied, prices tend to trade right around their cost of production, and if prices fall below their cost of production, they don't stay there for very long.
"There are really simple rules that can present opportunities for statute investors," he said. Corn and oil, which are both pervasive throughout the global economy, tend to follow these rules with "observable regularity."
Prices have adjusted lower due to the "old commodity adage [that] high prices cure high prices." Gilbertie said. Corn had been trading above its cost of production since 2021 with a reduced U.S. corn crop in the 2019-20 growing season, and in 2022, the invasion of Ukraine, a top global corn exporter, led to a spike in corn prices, he said.
More recently, farmers have been working to rebuild inventories, and that's leading to a return in U.S. corn to their cost of production, he said.
For the 2024-25 crop year, the U.S. Department of Agriculture is projecting a record per-acre corn yield of 183.1 bushels, Gilbertie said. With over 82 million acres of projected harvested acres, that will result in corn surplus inventories of over 2 billion bushels and a 14% stocks-to-use ratio, he said. The USDA defines the stocks-to-use ratio as the percentage that shows how much supply is left after a crop year.
A 14% stocks-to-use ratio is ratio level not seen since the 2019-20 growing season - before the corn markets began their rally to over $8 two years later, said Gilbertie.
If something similar were happening with oil prices, for example a fall in WTI below $50 on its way to $40 or lower, analysts would be promoting the event as a "tremendous opportunity for investors," he said, particularly given that fact that in the last 17 years, there have been three times when spot corn prices have doubled from their breakeven $3.50 to $4 levels.
The same investors who would find that story appealing should be "looking at the corn markets right now, because corn is the one trading at breakeven levels," Gilbertie said.
-Myra P. Saefong
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August 20, 2024 11:59 ET (15:59 GMT)
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