Teucrium Corn Fund: I Don’t Think Growth Is Over (NYSEARCA:CORN)

Instrument

The Teucrium Corn ETF (NYSEARCA:CORN) provides investors unleveraged direct exposure to corn without the need for a futures account. Therefore, the decision to invest in this fund should be made after analyzing the corn market.

Seasonality

Even adjusting for inflation, the current price of corn futures has hit a five-year high. I’m including the following chart just as a visual introduction to show you how high the price is right now. Next, we’ll talk about the reasons.

Ukrainian-Russian factor

The starting point of the current bull market for corn, as well as other commodity markets, was the military conflict in Ukraine. This country provides about 14% of world corn exports:

Now it does not matter at all how successful the sowing campaign of Ukrainian farmers was or what the state of corn crops is now. The most important question is whether local farmers will be able to harvest their crops. And if they can, where will they sell it? Since all the major ports are now blocked. If we assume that this volume will fall out of world trade, this will have a significant impact on the market.

It is also worth adding that the prices of wheat and corn are always in conjunction since they are partially interchangeable for industrial purposes. And from this point of view, the current price of corn futures is basically balanced with the price of wheat. I described my vision of the wheat market prospects earlier.

Weather factor

As often happens, the problems of the corn market are not limited to one Ukrainian factor. Now the weather is added here.

The United States is currently experiencing dry weather:

Moreover, this is not a theoretical problem. This has already led to the fact that the state of winter wheat in the US is the worst in the last 5 years. According to the latest survey of the fields, only 27% of winter wheat crops are in good or excellent condition. At the same time, the average five-year value exceeds 50%:

In addition, due to dry weather, the corn planting campaign in the US is at a record slow pace. According to the latest data, only 7% is sown. Given that, judging by the average, 40% should be sown for the current time of the year. Think about this gap: 7% and 40%!

In general, the latter factor indicates that farmers are likely to choose to reduce US corn acreage in favor of soybeans. Soybean can be planted after corn, and besides, it is not so demanding on fertilizers. Therefore, it is bullish for corn but bearish for soybeans.

Funds’ record long position

Funds, reacting to the above factors, increased their net long position in corn (391.912 thousand contracts) to almost a five-year high. At the same time, the number of sold contracts was reduced to the lowest since 2018 – 11.802 thousand contracts. The records don’t end there…

The total volume of contracts held by the funds now account for 16% of the total liquidity of this market. And more recently, this share exceeded 20%. This is an unprecedented high.

On the one hand, the action of funds once again confirms the current bullish nature of the corn market. But on the other hand, the funds will eventually have to sell this huge number of contracts. This means that if we assume a de-escalation occurs in Ukraine, then the funds will start to sell sharply and this will cause a market correction. You just need to be ready for this.

Fundamental Price

Now the corn market is moving with risks. But this analysis would be incomplete without trying to assess how much the current price of corn exceeds its balanced level.

In the corn market, as a commodity market, the price is formed on the basis of the balance between supply and demand. One of the key markers of this balance is the stock-to-use ratio. Therefore, in the long run, there is the relationship between the values of the stock-to-use ratio and the average price of the corn futures.

Based on this indicator, I built a model that allows you to approximately understand the adequacy of the current corn futures price in the market. Note that this model takes into account inflation:

So, judging by my model, the current corn price is already significantly deviating from its fundamental level. But there were even bigger deviations, for example, in 2013 or 2014. Therefore, I believe that the deviation is not yet critical.

What to do?

So, we have a market with increased weather risks, the geopolitical factor and with support from the adjacent wheat market. The only bearish factor I can mention is the funds’ record long position. However, I do not think that they will soon begin to actively sell. The only exception is the de-escalation of the situation in Ukraine. But this event can hardly be predicted.

Under these conditions, I consider it very likely that the price of the Corn ETF will continue to rise towards $32. At the same time, you can consider a safer trading strategy and sell a put option. It seems to me that the price of the ETF is unlikely to fall below $26 in the near future.