Corn is one of the most important agricultural products in the world. It is grown extensively as food for both humans and livestock, as well as to produce biofuel like ethanol.
But did you know? You can actually profit from trading corn via the futures market!
While trading corn is not as mainstream compared to the likes of bonds and equities (eg. S&P500), there are nevertheless full of trading opportunities and profit potential in corn.
In this post, let’s explore corn futures (ZC) and its massive potential to a trader!
Let’s learn about corn!
When it comes to corn, the US is the largest producer and exporter of corn in the world, where it exports about 20% of the world’s corn supply.
In the US, states such as Iowa, Illinois, and Nebraska are some of the largest corn producers in the country, which typically makes up of 1/3 of the total crops.
Corn is used largely to produce food products, live stocks for animals, and ethanol production which is commonly seen in alcohols and cosmetics.
Trading corn via Corn futures (ZC)
Traders can gain exposure to corn via Corn futures (ZC). Corn futures is an agriculture product traded under the Chicago Board of Trade (CBOT), with the specs as shown below:
1 contract of corn is worth 5,000 bushels
The minimum tick size of ZC is $0.0025 per bushel, which translates to $12.50/contract.
Let’s do a simple calculation to illustrate a trade with ZC:
eg. Let’s say we bought 1 corn contract that is trading at $4.50/bushel and it makes a $0.05 move up. How much would we make?
Calculation: $0.05 x 5000 bushels = $250 in profit
Why trade Corn Futures
#1 Access to leverage
Corn futures allow traders access to leverage while trading. This means traders can gain leveraged exposure to the notional value of a corn futures contract with a relatively small amount of capital.
For instance, if corn is trading at $4.50/bushel, a contract of corn would be worth $22,500 ($4.50 x 5000 bushels).
That said, a trader would not need to fork out the full $22,500 to trade 1 contract of corn. Instead, CBOT’s margin requirement for a contract of corn is around $2100 (at the time of writing), which translates to about 10.7x leverage.
#2 Ample liquidity
While corn is not a mainstream trading instrument compared to the S&P500 or bonds, it is a reliable product to trade on due to its ample liquidity.
In fact, corn futures are the most liquid and active market in the grains category, with 350,000 contracts traded per day.
As a result, this ensures minimal slippage issues while trading corn futures.
#3 Extended trading
The futures market can be traded overnight, and corn futures is no exception.
This allows traders to respond to news events related to corn with great flexibility.
#4 Regulated trading
Corn futures is CFTC-regulated and is traded on a central exchange (CBOT). As such, counterparty risk is extremely minimal compared to loosely regulated instruments like CFD or FX.
Tips to trade corn futures
Tips 1: Seasonality of corn
Seasonality is a huge factor that traders need to consider while trading corn.
In the US, corn is planted in spring (March – June) and harvested in autumn (Sept – Nov).
Due to the risk and uncertainties during the growing season (eg. weather risk), this makes March to June to the most volatile season for corn prices.
Meanwhile, the price of corn tends to reach a low in autumn, usually between October to November after the crops are harvested.
Tips 2: Weather risk
Weather is a huge thing in the agriculture industry, and corn is no exception too.
As such, it is crucial for corns traders to be aware of weather-related news and events. As an example, a dry spell or tornado in corn-producing states like Iowa, Illinois, and Nebraska can impact the supply chain of corn negatively.
Tips #3: Production-related news
Corn traders should also be mindful of news that are related to crop production in the US, which can also bring extensive volatility to corn price.
3 of the key news to pay attention to are:
o US Department of Agriculture (USDA) export report every Thursday, where traders can view the report on corn exports and get an idea of the export outlook.
o USDA planting intentions report that is released by the end of March. This report tells traders the estimated acres of farm space allocated for corn production, allowing traders to gauge the corn production for the near future.
o US grains stocks report that is released quarterly. This report gives traders an update on the stockpiles of corn in the country.
Tips #4: Currency risk
Traders should also pay attention to the strength of the USD while trading corn. Since the US is the largest corn exporter in the world, USD’s strength is a crucial influence on corn prices.
In this case, when USD goes strong, exports tend to become relatively more expensive to other countries, hence impacting the exports of corn (and vice versa).
Tips #5: News on Ethanol Production
Corn traders should also pay attention to any news around ethanol production. In the US, the government actually provides subsidies for ethanol production.
Since 40% of corn output goes into ethanol production, any swing in demand or political sentiment towards ethanol should be of high alert to a trader.
Verdict – Potential to make ‘corn-tinuos’ gains in corn futures
So, I hope this post gives you a solid understanding of corn and convinced you to see the potential of trading corn futures!
If you have any questions on futures trading, feel free to leave them in the comment section below!
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
Leverage is a financial tool that comes with its advantages and risks. Please learn and understand both the upsides and downsides of leverage before using it for trading.
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