The United States is the world’s leading producer of corn. In 2012, a drought ravaged the agricultural regions of the U.S. sending the price of the grain to a record high at $8.4375 per bushel. However, corn declined to lows of $3.01 in August 2016.
The grain is a staple food around the world, and population and wealth growth has caused demand to rise steadily over decades. In 1960, there were approximately 3 billion inhabitants of the earth.Source: https://www.census.gov/popclock/
As the chart of the world population clock as of January 13, 2018, shows, today the number of people in the world stands at 7.447 billion. At the same time, the standard of living in the world’s most populous country, China, has risen dramatically over past decades. Only so much arable land and water in the world is available for growing crops. While technological advances in farming have increased crop yields and supplies, compared to fifty years ago, there are more people with more money competing for finite raw materials and food products like corn.
Corn is not only a foodstuff, but it is also the primary input in the production of ethanol, a biofuel, in the United States. The U.S. government’s ethanol mandate requires that a percentage of gasoline that fuels automobiles contain corn-based biofuel to protect the environment. The ethanol mandate also serves to support farmers and corn producers during years when crop yields lead to an oversupply of the grain.
Since the 2012 crop year, when corn hit its highest price in modern history, five straight years of bumper crop production supplied the world with more than enough corn. Inventories have grown dramatically. However, corn can only sit in silos and terminals for a limited period as they deteriorate. In 2017, the price of nearby corn futures traded in a range from $3.285 to $3.9450 per bushel.
In the world of commodities, upward pressure on price that is the result of steadily growing demand tends influence prices on a long-term basis. Source: CQG
As the quarterly chart of corn futures highlights, it has been making higher lows for decades. In the late 1960s, the grain reached a low of $1.06 per bushel. In 1987 oversupply led to a low of $1.42, and bumper crops caused the price to trade at $1.74 in 2000. Since 2006, corn has not traded below $2 per bushel, and it has not been below $3 since 2009. Higher lows are likely the result of rising world demand because of demographics.
Each year is a new adventure when it comes to agricultural prices as the weather is the ultimate arbiter for the price. We are now heading to the 2018 season which will begin in spring and with corn trading at around the $3.50 per bushel level the trend tells us that demand could limit the downside when it comes to prices. Any problems with the crop could lead to higher prices later in the year. Therefore, trading corn from the long side provides an attractive risk-reward balance.