This month’s Manager Insights come from Teza’s Directional Futures research team. The Directional
Futures strategy seeks out real-time supply/demand imbalances in 59 different commodities and financial futures with the objective of determining whether these instruments’ prices will rise or fall over the coming few days. Starting in August, the Directional Futures team noticed an unusual phenomenon in the corn market that warrants a deeper dive.
Introduction
Corn futures are globally traded on multiple exchanges, including the CME in the U.S., Euronext in Europe, and TOCOM in Japan. Teza trades corn on the CME. Corn is consumed across many industries and geographies, and for a wide swath of purposes. The “sweet corn” variety that you enjoy in your salad or on the cob represents only one percent of corn planted in the U.S. “Field corn” is utilized for multiple purposes in the U.S.: 35% animal feed; 35% ethanol production; 13% exports; 3% high-fructose corn syrup; and the remainder is used in the production of other alcohols and sweeteners. The U.S. produces over 31% of the world’s corn crop. China, despite being the second largest producer of corn with 23% market share, is also an importer of the commodity. Even before the volatility of 2020, China was struggling with a substantial decrease in pork production due to the African Swine Fever. As the country attempts to regrow decimated hog herds, feed consumption has increased, directly impacting the price of corn. Another important dynamic was at play in the U.S. this summer. The Derecho storm of late August decimated over 8 million acres of corn crop in Iowa, resulting in a 1.2% drop in production and creating significant volatility in corn prices as the U.S. harvest period approached.