Wednesday, September 29, 2010

A Closer Look at Corn

From the USDA:

The major feed grains are corn, sorghum, barley, and oats. Corn is the primary feed grain in the United States, accounting for more than 90 percent of total feed grain production and use.


Corn acreage in the United States has increased from a government-mandated low of 60.2 million planted acres in 1983 due to provisions in the Federal Agriculture Improvement and Reform Act of 1996. The Act permitted farmers to make their own crop planting decisions based on the most profitable crop for a given year. While the number of feed grain farms (those that produce corn, sorghum, barley, and/or oats) in the United States has declined in recent years, the acreage per corn farm has risen. Moreover, the number of large corn farms (those with more than 500 acres) has increased over time, while the number of small corn farms (those with less than 500 acres) has fallen.


Corn production has risen over time, as higher yields followed improvements in technology (seed varieties, fertilizers, pesticides, and machinery) and in production practices (reduced tillage, irrigation, crop rotations, and pest management systems).


Strong demand for ethanol production has resulted in higher corn prices and has provided incentives to increase corn acreage. In many cases, farmers have increased corn acreage by adjusting crop rotations between corn and soybeans, which has caused soybean plantings to decrease. Other sources of land for increased corn plantings include cropland used as pasture, reduced fallow, acreage returning to production from expiring Conservation Reserve Program contracts, and shifts from other crops, such as cotton.

In other words, corn is a raw material that is processed in various ways into other goods which are then sold in some form.

Let's take a look at some data:

Corn is obviously the dominant component in feed grains.

Notice the continued increased in yield, indicating farming is becoming much more efficient.

Also note that demand and supply continue to increase.

Ethanol use is clearly one of the primary drivers for increased corn use over the last few years.

Corn is very important to agricultural exports:

The United States is the world's largest producer and exporter of corn. Corn grain exports represent a significant source of demand for U.S. producers and make the largest net contribution to the U.S. agricultural trade balance of all the agricultural commodities, indicating the importance of corn exports to the U.S. economy. On average, corn grain (excluding popcorn or sweet corn) accounted for approximately 11 percent of all U.S. agricultural exports by value during the 1990s. In 2008, due to record exports of corn and other feed grains, that share grew to over 12 percent of the U.S agricultural export value.

Here are the relevant charts regarding exports and imports:

The US is obviously the largest corn exporter by far

Notice the developing countries have continually increased their corn imports for the last 20 years. The Middle East is also a strong source of growing demand.

Let's take a look at the charts:

For the first part of the decade, corn prices were fairly subdued with the exception of an early 2004 price spike (A). Like all commodities, corn rallied in a big way in 2008, but fell with the recession (B). It consolidated in a triangle pattern (C), but has since rallied (D) in concert with wheat.

The weekly chart shows the 2008 spike (A) along with the triangle price consolidation (B) and the recent rally (C).

Prices have been in a strong uptrend since the beginning of June with two uptrends (A and B) ini place. Prices have consolidated gains during the rally in a standard downward sloping pennant pattern (C). Prices have recently topped (D) and printed three strong downward sloping bars this week. The EMA picture is still bullish (E), but the MACD has given a sell-signal (F).