Keys to Trading Corn Futures

A field full of harvested corncobs

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Trading corn futures is similar to corn farming, in that they both must pay close attention to seasons and the weather. Trading corn futures can be fairly subdued during the winter months, while the summer months are not for the faint of heart. Corn is planted in the spring and harvested in the fall, and this growing season is when most of the action in corn prices takes place.

The movement during the winter months usually stems from demand and how much of the harvested crop is sold every week. During the summer months, corn traders carefully watch every updated weather report for any potential weather problems in corn-growing areas.

Planting Intentions Report

In spring, the USDA's Planting Intentions report kicks off planting season for traders. This report is released at the end of March. The Planting Intentions report tends to set the tone for the market for the season. It reveals the amount of acreage that farmers intend on planting for each crop. The fewer acres planted, the lower the chance of a large crop. Analysts will take the number of acres and multiply it by a trend yield to get the expected size of the crop for the season to project the entire size of the crop.

Demand is the next part of the corn futures valuation equation. About 40% of the corn crop goes to ethanol production. Most of the remainder goes to feed livestock like cattle, hogs, chickens, and other animal protein. Perhaps surprisingly, only a small portion goes to actual human consumption. Therefore, it is more important to monitor the price of crude oil and gasoline, which determines the demand for ethanol. A cheap corn price while the price of crude oil is high, for example, can lead to an increased demand for ethanol.

The USDA Report

The USDA releases an export report every Thursday, which details the demand for corn exports. A strong export market will often help corn prices move higher. It is also advisable to monitor the price of corn from other exporting countries. If the price of U.S. corn is much higher than other competing countries, then the chances for a strong export market will diminish.

The summer months are when trading corn futures takes on another dimension. The high price for corn is often set in late June or August. This is mostly due to weather scares that happen during the height of the growing season, at a point when crops are most vulnerable. Extreme heat and droughts in the Midwest are the biggest fear for farmers and corn traders.

The Largest Corn-Producing States

Mid-to-late July is when corn goes through its critical pollination phase. Corn needs moisture and moderate temperatures at this stage to ensure a healthy and high-yielding crop. Extreme heat (roughly 100 degrees or more) and dry soil will damage crops, leading to lower yields. Crop damage causes the price of corn to rise.

The main states to watch for weather reports are Illinois, Indiana, Iowa, Nebraska, and Ohio. These are the largest corn-producing states. Pockets of extreme weather regularly affect smaller regions, but there are occasionally widespread instances of drought and heatwave—causing the price of corn to skyrocket.

Luckily, many bad weather reports don't play out under a worst-case scenario, and little material damage is done to the overall crop. The market will often move higher briefly, only to return to a lower price once the fear of crop damage subsides. More often than not, it is a good idea to look for selling opportunities during the summer months on these rallies.

How the Market Is Affected by Problems with Corn Crops

Every couple of years, the fears (or realities) of crop damage result in price increases that can be explosive. In 2012, a drought took the price of corn to an all-time high.

Corn has a seasonal tendency to hit peak prices during late June or early July. When there is a serious problem with a corn crop, the market tends to panic, and that can push the peak prices even higher. However, demand tends to fall substantially when prices rise to an extreme. It is the market's job to find a price that will stifle demand and ration supplies.

By contrast, corn prices often hit their lows around harvest time—usually in November. Harvest season is when the largest supplies are available and many corn farmers are selling their cash crops. After that, during the winter months, corn prices tend to have less volatility. Exports and demand are the main factors for corn prices during those relatively calm months.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.