When trade in corn, you trade in a commodity that is grown all over the world except Antarctica. United States is by far the biggest producer of corn in the world with ca 40% of total world production. China, Brazil, Argentina and several nations in the European Union is also big producers. Corn is not only used as food for humans and animals but also an important crop when it comes to produce biofuel, hence all these possible products you can create with corn is something you have to have in mind while investing in corn or trading in corn. Below we will go through some events and actions, and exemplify, that can affect the supply and demand of corn and therefor also the price.
When corn is used as food for humans its often in its fresh form, popcorn or as flower to make cornbread. But also for corn starch to thinken sauces and several spirits is made out of corn, several whiskeys for example. Dried corn is one of the most used feedstuff for chickens but processed corn is also common as animal feed.
Corn was fist domesticated buy humans in the southern parts of Mexico around 10.000 years ago and was brought to Europe by Cristopher Columbus.
As you can see on the corn-plant it looks a lot like an overgrown straw of grass i.e. its quite logic that corn is a member of the grass family.
Farmers start with plating a seed in the spring and harvest during the fall, in the USA which is the biggest producer of corn the planting occurs between April and June and they harvest between October and November.
Corn grows in similar environments as the soybean and its quite common that farmers in the beginning of the season decide what to grow, and they will probably choose the crop that they think will bring them the biggest profit. We will go through this later in the text but when you trade in corn the price relative to soybean is something you should have in mind and its quite easy for farmers to changes their crop from one year to another.
What affect supply and demand in corn?
When you trade in corn what you really do is try to predict price-moves, and the price often move due to supply and demand, so bellow we will try to exemplify and show some events that may move the supply and demand for corn which also can affect the price of corn.
- Changed demand for biofuel
- The price of soybean
- Governmental changes in subsidiaries and laws
- Emerging market’s Economic development
As explained above corn is one of the most common used crops in the production of biofuel. And if the government change taxes or subsidiaries on biofuel this can affect the demand for biofuel and also corn. Right now, several governments subsidize biofuel which will probably increase the price on corn and can be a reason you want to be positioned long when you trade corn.
The price of fossil fuel can also increase the demand for biofuel, if the price of fossil fuel increases too much consumers may look to buy more biofuel, but an “event” like that will not happened over night and is a scenario for a person who wants to invest in corn rather than trade in corn.
As we mentioned above, the corn-soybean ratio is something you need to consider when you trade in corn, its quite easy for a farmer to change his or her crop from one year to another, from corn to soybean or vice versa, from soybean to corn. As most business owner farmers is too motivated to maximum their profits. A low or high price on corn or soybean can affect the amount of land farmers use to grow corn or soybean which is something you have to remember when you trade in corn so you don’t get surprised with a bigger or smaller harvest that you thought of in the beginning of the season when farmers decide what to grow. The planting season is as we said above between April and June in the USA, so if the soybean price is high at this period this can increase the amount corn farmers grow and decrease the harvest of corn in October to November.
As a rule of thumb when the corn-soybean spread is below 2,1 to 1 corn is historically expensive, meaning that you “only” need 2,1 pounds (or less) of corn to buy one pound of soybean. When the spread corn-soybean is above 2,4 to 1 soybean is seen as expensive which means that you need 2,4 pounds (or more) of corn to buy one pound of soybean.
Government and laws play a major role in farming. Farming and farmers can often be attracted to change their crops to something that the government wants, like in the biofuel example above. This can and will change the willingness for farmers to grow corn and something you have to have in mind as an investor or trader in corn. A change in laws can increase the incentive for a farmer to grow more or less of corn and affect the supply and therefore the price of corn.
Emerging markets does play a major reason in several commodities and corn is no exception. As we wrote earlier corn is commonly used as animal feed, and as economies grow people tend do eat more meat which can in the long run increase demand for corn and a theme a long term investor in corn could or should have an opinion on.
Several emerging markets has also improved and increased their use of environmentally-friendly energy sources, and as we have mentioned in several occasions above, corn is commonly used in biofuel production.
Weather is always something you need to have in mind and make up your opinion about when you trade in corn. And as other crops corn need to have enough amount of sun and water, and not too much of anything. Extreme weather can affect harvest both in amount and quality, long-term weather changes is something you need to have in mind if you invest in corn and the weather changes of a more short-term like floodings is something you need to have in mind when you trade in corn or use as a good entry point as an investor in corn.
Reasons you might invest in corn
- Hedge on inflation
- Play the biofuel trend
- Diversify your portfolio
- A play on emerging markets demand
Inflation tend to have an impact on commodities and invest in corn can be a way to protect or profit from changes in inflation. High inflation tend to be supportive for commodity prices and low inflation does often have a negative impact on the price of corn or other commodities. An investment in corn can bee seen as a hedge against inflation since some other asset classes can perform poorly during times of high inflation.
Biofuel does have an impact on the demand of corn, are you bullish or bearish on the future consumption of biofuel? Go long or short corn can be an investment that can make you money if you predict the future of biofuel correctly. And invest in corn is something you can do both on the long and the short side.
Diversification is a major reason for investors to look for an investment in corn. Commodities in general has historically had a low correlation to other asset classes, so ad an investment in corn to your portfolio will in theory increase your diversification.
As we mentioned several times above emerging markets with china in the front are big consumers of corn or products that need corn as an input, like biofuel and meat. An investment in corn can be a way to play a change in the emerging markets demand and economy both if you are positive or negative.