Posted on October, 16, 2023 at 07:05 am
The Different US Harvest Seasons
The harvest season for corn in the United States (US) typically occurs in the late summer and early fall. The exact timing of the corn harvest can vary depending on geographic location, weather conditions, and when the crop was planted. However, a general guideline for the US corn harvest season is September to November. The CMEGroup futures exchange offers a September and December contract for hedging new crop price risk to commercial traders.
Corn producers in the southeastern US typically use the September contract for hedging. They can get their crops in the ground earlier in the year, allowing an earlier harvest. The southeastern region produces much smaller yields than the mid-west corn belt, resulting in less hedging and lower trading volume in the September futures contract.
Corn producers in the corn belt must wait until later in the Spring to plant their crops due to the colder temperatures in their region. Therefore, a delayed planting leads to a later harvest. Corn belt producers use the December futures contract for hedging. Due to the large volume of corn grown in the corn belt, the December futures contract has enormous trading volume and is used as a benchmark for new crop corn grown in the US.
Seasonal Decline
Corn prices typically experience a seasonal decline immediately following the harvest. This price decline is a result of the "harvest pressure." As producers bring in their corn crops, the increase in supply can put downward pressure on prices, as there is a greater abundance of corn available in the market. Due to the consistency of the annual corn harvest season, a reliable seasonal pattern for traders has formed that we will discuss in this article.
Storage and Transportation Costs
After harvest, many farmers store their corn in silos or other facilities, which can be costly. They may choose to sell their corn immediately to avoid these storage costs, which can also contribute to downward pressure on prices. To incentivize producers to store most of their harvested corn rather than bring it all to the market, forward futures contracts typically are priced in contango (normal market), where the near months are priced lower than the distant months, allowing producers to lock in higher prices for the next harvest season.
In early 2023, corn prices were inverted (backwardation), where near months are priced higher than distant months. During an inverted market, end-users and producers empty grain elevators by selling corn at higher prices.
During harvest seasons, end-users of corn are aggressively accumulating corn at these seasonal low prices to begin refilling the grain elevators in hopes of selling into higher prices in the coming crop year due to the contango price structure. The higher prices in forward futures contracts allow end-users to lock in a price that assists them in paying for storage, insurance, and financing fees, referred to as carry charges.
While this is typically bullish for corn prices, a lot will depend on the producers and how much their new crop they have already sold. If there has been little selling of this new crop, the end of the harvest season could create storage issues on the local farms, and they will be forced to sell a large amount of corn to avoid having to pay additional off-site storage and transportation costs.
Demand Factors
Demand for corn can also play a significant role in post-harvest prices. Corn is used for various products, including animal feed, ethanol production, and export products. The demand for these products can influence the price of corn. For example, ethanol consumes a large portion of corn production. Gasoline demand impacts ethanol prices. In September, gasoline refiners can switch to a much less expensive refining process, helping to reduce gasoline prices. Seasonally, gasoline demand decreases after the first week of September as family vacations and other recreational activities wane, and people are back to work and school. Less demand for gasoline is bearish for ethanol prices.
Export Market
Corn is a major commodity in international trade. The global demand for corn and factors such as exchange rates and trade policies can impact prices after harvest. Exports can be a significant driver of corn prices.
The benchmark December futures contract fell below $5.00 per bushel in August and is at the lowest price since the 2021 harvest season.
China, the largest importer of corn, has been struggling to stimulate its economy and has reduced its purchases of US corn. Some of the sentiment shift from China is that Brazil's corn is much less expensive than US corn. The US and Ukraine were China's biggest corn providers. But, since the Ukraine war, China has shunned both Ukraine and US corn imports compared to past purchases.
Upcoming Seasonal Window for Traders
The recent USDA report reflected increased livestock put in feedlots, resulting in more demand for corn. On a positive note, increased livestock on feed will raise supply for next year, and the USDA sees lower prices for beef and pork. The USDA also reported a slight yield reduction in corn, another bullish factor.
This would usually be bullish for corn, but the contango prices reflect a normal to over-supplied market. The harvest for this year will still result in a significant stocks-to-use ratio.
During the past 15 harvest seasons, MRCI research has revealed that the March futures corn market has rallied (blue line) into the October 31 seasonal sell window. 14 of those 15 harvest seasons have seen a price decline that closes lower on November 24 than approximately October 31 93% of the time—three of the harvest seasons never had a daily closing drawdown during the seasonal window.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must also consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
In Closing
Traders have multiple products to participate in corn market speculation. The standard-size corn futures contract ZC, the mini-corn futures contract XC (Barchart XN,) and the Exchange-Traded Fund (ETF) CORN are available.
The recent USDA report leaned slightly bullish for corn. Still, the October report is more significant when compiled with the September and November reports for a complete look at the harvest. January will have the final harvest numbers and project a more precise direction for next year's crop.
Source: Barchart