While Corn Hibernates, Let's Visit Brazil

In a recent article for Barchart, "Ah, Shucks, Corn Prices Are Looking Higher," I discussed why I thought the seasonal corn pattern appeared ready to resume to the upside. Since that article, Brazil has had a bumper first of two crops of corn this year, guiding the USDA to believe that Brazil will overtake the US in 2023 as the leading exporter of corn. 

Specifications, Description, & Performance 

Corn is a member of the grass family of plants and is a native grain of the American continent. Archaeological discoveries show that cultivated corn existed in the southwestern US for at least 3,000 years, indicating that the indigenous people of the region had grown corn as a food crop long before the Europeans reached the New World. Fossils of corn pollen over 80,000 years old have been found in lake sediment under Mexico City. Corn is a hardy plant that grows in many different areas. It can grow at altitudes as low as sea level and as high as 12,000 feet in the South American Andes Mountains. Corn can also grow in tropical climates that receive up to 400 inches of rainfall annually or in areas that receive only 12 inches of rain annually. Corn is used primarily as livestock feed in the United States and the rest of the world. Other uses for corn are alcohol additives for gasoline, adhesives, corn oil for cooking and margarine, sweeteners, and as food for humans. Corn is the largest crop in the US in terms of dollar value and the number of acres planted.

The largest futures market for corn is at the CME Group. In Brazil, corn futures trade at the Bolsa de Mercadorias & Futuros (BM&F). 

Source: Barchart -CRB Yearbook

Performance 

For the last three months, corn has appreciated by 1.5%; in contrast, the prior 52 weeks had double-digit gains of 11.6%. Most of the yearly growth could be attributed to weather, supply-chain issues, and geopolitical events in Ukraine. Corn appears content in this narrow range since August 2022 until some more evidence of events that could disrupt this balanced supply-demand situation. 

Between the last harvest and the new planting season, it is common to see these market doldrums. But, with the backdrop of the prior year's events, it is worth reviewing Brazil's impact on corn prices. 

Brazil, the Other Corn Exporter 

With so many different climates around the world, why is it that Brazil produces so much corn? Brazil has several advantages in corn production, including ample land and a favorable environment with a long growing season in much of the country that enables two harvests per year. 

Difference between the world's largest producer and exporter. The United States is the world's largest producer and consumer of corn. On average, US farmers plant about 90 million acres of corn yearly, with most of the crop grown in the corn belt region covering these States: Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. 

Due to Brazil's bumper crop of the first 2023 harvest and the weaker Brazillian Real currency, lower prices will drive more customers to Brazil's corn. Some analysts suspect that if Brazil's second corn harvest of 2023 is above average, lower corn prices globally will appear. If this event comes to fruition, then Brazil will dominate the role of the world's largest corn exporter.

As China, the world's dominant corn importer prepares to open their economy after the pandemic, many expect to see Brazilian corn purchases much higher than usual due to the lower prices Brazil can offer. 

We are putting excessive demand on the US corn crop. Could the US feed the entire world's corn demand? Before the Ukraine-Russia escalation, the answer was yes. But, now that Ukraine, the world's third-largest exporter of corn, is at war, the concerns are getting the crop out of the country. The Brazilian bumper corn crop supply will be a welcome advantage to world corn prices. 

Brazil's second harvest is "Safrinha," Portuguese for "little harvest." Another top pork producer, Vietnam, is said to be waiting until the harvest of Safrinha before making tenders for Brazillian corn due to the abundance of pork accumulated for the Chinese New Year festivities. Reducing demand for corn will add more pressure to corn prices. 

Seasonal Patterns 

Source: Moore Research Center, Inc. (MRCI) 

MRCIs research confirms that February has historically been a slow to sideways month for cash corn prices. The volatility improves in March as the corn market prepares for its last seasonal rally into the spring planting season, where commercial producers will aggressively begin to sell futures for hedging purposes. 

Patience continues to be the order for the corn market. Traders await the outcome of the Brazillian Safrinha harvest and the strength of the Brazillian Real currency to determine the direction corn prices take. 

Summary

Both a standard and a mini-size contract are available for trading. The standard size symbol is (ZC), and the mini-size is (XN). There is an Exchange-Traded Fund (ETF) symbol (CORN) for equity traders(ETF) symbol (CORN). Options are available on the standard-size futures contract and the CORN ETF. Before trading options, futures, or equities, seeking training first is recommended.

Trading requires understanding the fundamentals of the markets, especially physical commodities: 

• Brazil is in the southern hemisphere, where the summer season exists, allowing their crops to be produced and adding to the world supply.
• Because the export transactions are done in Real currency, it is helpful for traders to understand where that currency is concerning the US Dollar.
• Knowing which countries in the world are the primary importers of a commodity can help a trader better understand if there could be a demand disruption this year
• Severe weather patterns in the primary producing countries of a commodity can give traders a heads up to a potential supply disruption.

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