Episode 71

Eyepopping Corn Prices – Fueling Food Inflation

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Senior Market Analyst at Interactive Brokers

Sean McGovern, vice president of research at McAlinden Research Partners, and Jeff Praissman, IBKR’s senior trading education specialist, join host Steven Levine for a deep discussion about today’s elevated corn prices, their impact on producer and consumer costs, as well as ahead of key beverage company earnings. What can traders and investors learn about China’s role as a global buyer? Will Brazil surpass the U.S. as top crop producer? And what can options traders tell us about companies like Coca-Cola and PepsiCo? All this and more as our agricultural commodity series continues…. 

Note: Any performance figures mentioned in this podcast are as of the date of recording (April 10, 2023).

Summary – IBKR Podcasts Ep. 71

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Steven Levine

Hello, and welcome to IBKR Podcasts. I’m Steven Levine, senior market analyst at Interactive Brokers. I’m your host for today’s program. Sean McGovern is back with us for our ongoing series on agricultural commodities. He’s vice president of research at McAlinden Research Partners. They’re a terrific independent investment strategy group that focuses on identifying alpha-generating investment themes, and they have a lot of commentary on our Traders’ Insight platform. So, it’s great to have you back with us, Sean!

Sean McGovern

Thanks, Steven. Great to be here.

Steven Levine

Yeah, it’s great to have you. Jeff Praissman, IBKR’s senior trading education specialist – he’s also here with us. How are you, Jeff?

Jeff Praissman

I’m doing great, Steve. Thanks for having me, and it’s great to see you, again, Sean.

Sean McGovern

Same to you. Same to you.

Steven Levine

All great, all great, all great. Jeff’s going to be on our Trader Workstation [TWS] platform, and he’s going to be using our tools and his own research to help us out on how corn futures, and certain companies and stocks in the ecosystem of corn-related products, are doing. It’s a rather large field of players, right? So, we’re going to try and narrow the scope a bit on that and focus on some of those companies whose products are produced with the corn futures that are trading on the exchange.

So, for this discussion, I thought we’d changed things up a bit from our previous podcasts. We talked about coffee and wheat futures – those were podcasts called ‘Time for a Coffee Break?’ and ‘The War on Wheat,’ which, if you haven’t already, Sean’s given us some great insights on both of those. They’re now streaming on IBKR Podcasts and Spotify and Apple Music … and wherever you listen to your podcasts. And I thought we’d just dive right in on this topic….

Corn – What is it Used For? (Almost) Absolutely Everything

Steven Levine

As I understand it, corn is used for a wide variety of purposes. It’s in several different business sectors. It’s got a huge involvement, obviously, with consumer staples but also industrials and energy and pharma … from corn sweeteners in foods like high fructose corn syrup to biofuels like ethanol to all sorts of different industrial uses, and I had no idea that corn was involved in, say, the production of envelopes and sandpaper and batteries…. We’re not going to be focusing too much on that, but I thought that was really interesting, and it also is involved in producing drugs like antibiotics.

First, Sean, what are we trading on the exchange when we trade in corn futures? And what kind of products are these mainly used to produce?

Sean McGovern

Right. Well, the contract we’re talking about when we refer to the corn futures, it’s going to be the CME Group’s contract. Now, the name of the contract is typically quoted as C-B-O-T, or CBOT, you’ll usually hear people say. That’s for the Chicago Board of Trade. But CBOT actually merged with CME back in 2007, so, essentially, CBOT is now just one of the four exchanges under the CME Group. The corn is going to be priced in bushels and have five delivery months throughout the year. It’s going to be September, December, March, May, and July. Corn futures are the most liquid and active market in agricultural commodities, and that’s not only because corn is so widely used in human cereals and other foodstuffs, it’s also a major component in animal feed – that’s overlooked sometimes, but it’s really critical, because it’s going to impact the prices we see for beef, chicken, pork … all the meat at the grocery store that isn’t grass-fed. If higher costs are going into feeding the livestock, there’s probably going to be a need to raise the final prices of the meat coming out of those animals. The USDA’s data – that shows about 30% of the domestic corn usage in the countries going toward feeding the livestock over here. And one more thing is biofuels, particularly ethanol. You probably see that the gas station –

It will usually say like 10% ethanol or something on the gauges, and that’s going to make up another significant portion of corn demand ‘cause that’s mixed in with gasoline. Air quality regulations, or renewable … renewable fuel standards … that’s going to require about 10% of ethanol to be used in almost all of the gas in the United States.

Corn – At What Cost?

Steven Levine

Are the corn futures prices reflective of, perhaps, producer prices?

Sean McGovern

Oh, yeah, absolutely. Yeah, yeah. I mean, I follow the Producer Price Index (PPI), and I discovered one recently that was kind of interesting when I heard that we’re going to be doing this topic, and it’s a series specifically for corn sweeteners. And, so, that’s going to be anything corn syrup, sugar, oil … anything produced from wet milling of corn. That index showed a year-over-year increase of 27.4% in February, and that was almost a 29-year high and suggests we could see a whole lot of inflation still in the pipeline for like soda, candies … anything incorporating corn-based sweeteners.

Steven Levine

We’ll be getting to that bit later, but I have also noticed high fructose corn syrup … corn sweeteners. Yeah, just off the charts. I mean, the Fed has [Federal Reserve Bank of St. Louis] got some indexes that I’ve been looking at, and soda … soda bottles … two-liter soda … just through the roof, it seems. It’s incredible. But Jeff, can you tell us where are these corn futures trading now on the continuous contract on TWS?

Jeff Praissman

Sure. So, right now, they’re trading around $650, and year-to-date, they’re down about 4% or so given the high was kind of mid- … early January, a little bit north of $680. But if you take the trailing 12 months, it’s down about 15%. And back in May 2022, they were a little bit north of $800, and if you take a little bit further back for the last five years, it’s actually up 63%. But with that being said, they seem to hover around $400 for quite a while between 2018 and mid-2020 before they really started exploding at the end of 2020. And beginning 2021, going north of $700 … and then in the beginning of 2022, going north of $800 for a little bit.

Steven Levine

I’ve seen them plateau for a little while. They look like they’re headed a bit south at this point, but I mean, overall, compared to that 2020 low, prices have been really elevated on corn to the extent … it’s different than wheat, for example. I mean, corn prices still seem to be hovering fairly high. I understand there’s been some bans on corn exports. I don’t know if that has anything to do with it. There was a World Bank report from March that these bans covered a little over 5% of shipments … [they] accounted for more than three-quarters of [the] over 15% increase in corn prices. Sean, what can you tell us about these bans? I mean, I know Russia had also a ban on wheat in the first half of 2022, but are these bans affecting, say, the prices for corn futures? Are they affecting everyday prices for consumers? Producers? What can you tell us about this?

Sean McGovern

There’s been several countries enacting export bans for all kinds of food supplies over the last year – that’s going to include corn and other grains. We’ve seen all kinds of bans … in India, Serbia, Egypt … countries in many different regions around the world. The bans are coming out of an understandable need to shore-up the food supplies in their own countries, but that ends up driving food inflation in other places. At this point, most of the countries with restrictions still in place are typically smaller exporters of crops, and they’re coming up short because of the large exporters like Russia and Ukraine not getting their usual share of supplies out to the world. So, it’s kind of a domino effect, but when it comes to corn, specifically, we’re seeing or monitoring ongoing bans in Russia, which just enacted a partial ban on grain exports last month and that will continue through at least June 30th. We talked in February about the ‘war on wheat’ – the war on the wheat supplies that has continued on since the start of the war in Ukraine. Similar to wheat, Russia and Ukraine also export a significant amount of corn supplies to the world. And that’s going to be wrapped-up in that Black Sea Grain Deals that we’ve talked about. They do end up being extended in March, but only for 60 days, as opposed to the 120-day extension that Ukraine and other partners in the agreement were seeking. That sort of lines up with our expectation that Russia is like quiet quitting on the deal, as you might say. That is, they’re not leaving outright, at least not yet, but also not fully holding up their end of the bargain. And that looming uncertainty around the deal, which seems pretty tenuous at this point, is going to create risk in wheat and corn markets going forward.

Just to talk a little bit more about the prices Jeff was just quoting a little bit earlier is – a cursory look at corn prices going back to this time around last year or so. That would show corn prices have fallen significantly, down from the $750-$780 area to around $650 or so today. But if you extend your view out a little bit further … around three years … or almost anytime from 2015 to 2020, you see that corn is still elevated well above those levels, which range between $300 to $450 a bushel. In essence, corn prices have fallen, but it’s hard to say that they aren’t still elevated, and that’s just due to so many different factors that have come into play. We’ve had severe droughts, war in Europe, supply chain chaos … and it’s going to take a while to unwind all that. Even if we saw a serious slowdown in growth that would ease some of this demand-side pressures, people still eat in a recession, people still use gasoline. It seems like supply-side continues to be the real driver [of] what we’re seeing in corn markets.

Global Supply & Demand:

Brazil Poised to Surpass the U.S. as the #1 Producer

China – An Indicator of Buying Opportunity?

Steven Levine

I understand China has got some potential increase in demand or healthier demand. I know they had an uptick in purchases of U.S. corn, for example, pretty recently. So, [the] U.S. is – I understand from the USDA anyways – it’s the world’s largest producer, consumer, and exporter of corn. So, what can you tell us about our own domestic production? How much of it stays within our borders, how much of it leaves our borders, and what kind of challenges, do you think – I mean, I understand there are some other countries that have come into the competition fray – Brazil, Argentina – and Argentina is perhaps experiencing some challenges with their weather there….  I think that the Buenos Aires Grain Exchange had cut its outlook on Argentina [corn supply]. But what do you think … in terms of exports for the U.S.? Is it becoming more and more uncertain, or what do you think?

Sean McGovern

The U.S. is a huge consumer of corn, and a lot of that stays here because we produce a lot, too. Up to one-fifth of that is going to go out to the world though. That’s a relatively small share, but for something like 2021 to 2022, that was still north of 62 million metric tons, and that’s enough to make the U.S. the top exporter of corn for now. So, yeah, plenty of corn we’re making … but a lot of it – the small share that’s going out – is still a huge, huge amount. And I’m glad you mentioned South America. You mentioned Argentina, but Brazil is one of the big places that we’re watching, and we’ve been monitoring it closely since it’s right on the U.S.’s tail to take the crown for corn exports this year.

Steven Levine

Oh, really?

Sean McGovern

They could surpass us this year … sometime within the next decade, that’s probably going to happen … but the latest USDA numbers expect Brazil to achieve a second consecutive year of record corn shipments, and that’s going to be about 50 million metric tons … to all different destinations around the world. That’s like a sevenfold increase over the past 15 years. The U.S. is only going to do about 47 million metric tons of corn this year, and you could tell that’s a significant drop-off from what we saw in the 2021 to 2022 period.

Steven Levine

Why is Brazil surpassing us, and why are we producing less?

Sean McGovern

Well, that’s a great question. So, the University of Illinois has great data on this, and the acreage in Brazil has actually risen 72% over the last 20 years. That’s just the acreage for corn. And the U.S. – you’ve really only seen about 12% growth, and going out to 2031, the USDA says Brazil might have up to 49 million acres of land it could still use to expand its crop production over that period. So, they’re going to catch us. It’s really just a matter of time. And you also mentioned China. That’s the engine behind the growth. They are taking in massive amounts of Brazilian corn these days, and we’d probably be expecting Argentina, like you mentioned, to be joining in on this, but they have had the problems with their weather, and the exports out of Argentina are probably going to be 28 or 29 million tons in this marketing year. If that does come true, that’ll be the lowest since 2017 to 2018. We’re watching the weather right now in Brazil, specifically, since their exports slowed down pretty significantly in March. That some warm weather came in … warm and dry weather. And while that’s not ideal for corn crops that are already in the ground, they’re delayed. They had a lot of delayed plantings this year. What you have to understand about Brazil is they have … they plant corn all year round, and they have three different harvests, and right now they’re in the second. It’s the second harvest is called ‘safrinha,’ and it that just means ‘off-season,’ but really it’s just the second harvest, and they sow that in fields where soybeans have already been harvested, which is why it’s the second season, and that it was really late this year. It’s actually the biggest driver of Brazil’s crops. So, I think it’s up to 70 to 75% of national production comes out of this safrinha. The issue is, like I said, it’s time-sensitive, and if you plant it too late, which seems to be what happened this year, it could be exposed to frost and other bad weather that can really mess up corn. Going into April, which is kind of the wet month for this corn in the Midwestern part of Brazil, we’re going to be watching that, and that precipitation could have a really big outsized role in determining the trajectory of corn futures in the year ahead, because Brazil is just such a huge producer right now.

Steven Levine

What does WASDE say about this? What does WASDE’s outlook look like?

Sean McGovern

Last month, they did expect the U.S. exports to be lower, and that’s actually what came out. And it was 75 million bushels less than what most people were expecting. I don’t want to talk too much about WASDE, because we actually won’t get those new numbers till tomorrow. Perfect timing, right. But there’s some things you can watch for. That’s what I was going to say is you can watch for some really specific things in this new WASDE report. Some of the USDA numbers outside of the WASDE last week showed that corn stalks at the start of March were about 7.4 billion bushels. That’s down 5%, or about 180 million bushels from the same time a year ago. And we can continue to watch how the exports grow, and how the production is, like what the plantings look like … but there was one other kind of series that you can also glean something off of when it comes to WASDE, and that was going back to China. We mentioned earlier that they’re having this buying spree in Brazil. They’ve really been buying everywhere, and it’s not just corn. In fact, they’ve been stocking up for some time, and WASDE has some numbers on this. So, right now, China is holding about 70% of the world’s total excess corn, more than half of the excess global wheat, and around one-third of the global soybeans. China likes to buy when they see that they’re getting a deal, that things look relatively cheap, and if they’re buying right now, that could mean their government sees prices potentially going up in the near future, and they’re trying to vacuum up whatever they can get right now while things are staying cheap.

Steven Levine

So, they’re kind of an indicator in a way? That’s very interesting.

Sean McGovern

Exactly.

The High Cost of Corn Sweeteners:

Beverage Company Earnings on Tap (KO, PEP, KDP)

Related Stocks, Options, and Consumer Prices

Steven Levine

And we touched upon this earlier – corn is involved in a lot of different business sectors, a lot of different areas, a lot of different areas of production. But corn sweeteners – we’re sticking with our focus on food products and food inflation – and we touched on this earlier: high fructose corn syrup. I noticed this, and that’s a huge ingredient in a lot of different kinds of foods.… If we look at breakfast foods, for example, it’s huge ingredient in lots of types of jam, or maple syrup … certain juices that are supposed to be fruit juices, but they pass as fruit juices, I suppose … but also in soft drinks and in soda and I see high fructose corn syrup up from, let’s say, just last year – it’s over 40, about 45 1/2% higher in price. I mean, it’s crazy expensive these days, it seems. So, I guess I throw this question out there now to everybody, whether or not you’re buying anything with high fructose corn syrup and have noticed any kind of price differences from last year. I don’t eat anything with sugar. I don’t know, but I’ll throw that out to you.

Sean McGovern

I’m glad you took the opportunity to tell us just how great your diet choices are, Steven. You know, you’re the healthiest one here, as we know, every episode we find out something new about how healthy Steven is.

Steven Levine

Well, it’s a 180-degree reversal from the way it used to be, because all during the pandemic, I could tell you whether or not I was spending more on M&M’s or Lucky Charms … and there’s other product placement that doesn’t belong here…. So, I did drink and eat a lot of sugary things, and I gained a lot of weight and so, you know, I had to do something about that. So, I am not eating any sugar anymore. That’s it. No more. There could be, obviously, you know, natural sugars … in pineapple et cetera. But anyway, I’m leaving it to you guys … whether or not you all –

Sean McGovern

You’ve just got sprouted grain bread and no corn syrup …. sounds good.

Steven Levine

I’m listening to the dietary guidance in my mind, you know, from my days in elementary school. Anyways, please….

Jeff Praissman

Considering I’ve ate about 800 jelly beans over the last three days, I don’t think I’m quite as healthy as Steve. One thing I have noticed though is – I don’t know whether or not the prices have risen or not for say, soda – but the one thing I really noticed at the supermarket is it seemed like in the past, every time you went, there was a sale in soda. So, it was buy, you know, one 2-liter, get the other one for 50% off, or buy a 12-pack of, say, Coca-Cola, and get the second one for 50% off. At least from what I’m observing, it seems like there’s less and less of those sales going on in this in that aisle. So, whether or not they’re raising prices directly, or they’re just not discounting anymore, it seems like, certainly overall, it’s more expensive to eat unhealthy.

Steven Levine

Yes, see – so, not only is it bad for you, but you’re also spending more money on that. That’s not right. What do you think, Sean?

Sean McGovern

As I mentioned at the top, I was really shocked by the producer price increases in the corn syrup … anything that’s coming from corn is just going to be up. And especially if you look at that over a period of just more than just year-over-year … if you look at two years or three years …. you know, it might be slowing down a little bit now ‘cause we have seen some disinflation in the economy now … not seeing really any deflation by any means, but I would expect that corn syrup, or anything that it goes into, is going to follow the broader trend of food inflation, which we’ve seen has been persistently resilient.

Steven Levine

It’s very interesting. The Saint Louis Fed has a price chart of two-liter soft drinks. It shows a spike of over 38% in February from the prior year. And if you look at the latest earnings from, say, Coca-Cola … PepsiCo … there’s still a lot of demand, it seems, even though these prices for these products have been rising. Coke had an organic revenue growth of 15% in the fourth-quarter; full-year [2022], it was up 16%. And, so, I’m sure these higher commodity costs, [and] other factors, I’m sure are eating into its margins … impacting its cash flow, but, you know, Pepsi is pretty much mirroring that same activity. And we mentioned this also because Coca-Cola does have its first-quarter earnings coming out on April 24th. PepsiCo on the 25th, also Keurig Dr. Pepper on the 27th; so, this is very timely in terms of that kind of discussion. What are you seeing, Jeff? I mean, these stock prices, I think on some of these soft drink companies are also mirroring their activity.

Jeff Praissman

The one thing I notice – and to kind of narrow it down again ‘cause, you know, corn is in everything – but just looking at the beverage companies: Coca-Cola, Keurig Dr. Pepper, and PepsiCo – looking at the call and put volume – overwhelmingly – the majority of volume in contracts, as well as notional value, is on the call side of it. So, in other words, more investors and traders are coming in and buying call options versus put options, again not just in contract size, but as well as the notional value of the contracts as well. So, it seems to be signaling that people do believe that these companies will, you know, continue to rise … as far as the stock price.

Steven Levine

So, Sean, do you foresee perhaps these prices just continuing to rise? I know you talked about corn as being something that looks like it’s got a lot of challenges … in terms of supply chains et cetera … but what do you think?

Sean McGovern

It’s doubtful that we really see any relief for inflation and stuff any more than we see gradual disinflation happening throughout the economy, which we have seen, if you look at the various consumer price indices. Any kind of gauges of inflation, we are seeing gradual disinflation, and you want to hit on that word specifically, because that’s prices are still going up, but by less. That’s not really getting us anywhere near levels of meaningful deflation. That’s when prices are actually declining. As we’ve said, the demand-side risks are certainly there with interest rates as high as they are, and growth appearing to slow down. And now you also have consumer sentiment reversing course after getting back on track for several months. But right now, in the scope of corn products, that … or any products that utilize corn … the expectation from the USDA is that the U.S., and the world at large, will use more corn than it produces for the sixth consecutive year. And that’s going to keep markets tight. In the scope of stocks – I don’t have any color on any specific stocks – but I am remembering something from when we talked about coffee – that all of these brands, they compete with private label … every store, they have a ‘Coke’ or a ‘Pepsi’ kind of replacement, and because inflation has actually gone up for private labels so strongly, that has pushed people back toward name brands, because the kind of benefit you’re getting – you know, the difference in cost – is actually starting to compress a little bit, and there’s not as much benefit to buying a private label versus purchasing some kind of premium product. So, if that’s going away, that could help organic sales of these companies.

Steven Levine

Do you think they can move back to sugar-based products as opposed to this high fructose corn syrup? I wonder….

Sean McGovern

Oh, they can. They can. Well, actually, it’s interesting. This is kind of been going around on the Internet as a little bit of a trend – is that for Passover, [some] Jewish people, they can’t eat corn. So, they have to have Coca-Cola that uses natural cane sugar. And, you know, most people didn’t know about this until it became a big fad on the Internet – is that if you see Coca-Cola at the store, it has like a yellow cap. That means it’s made with sugar cane, and it’s kosher for Passover.

Steven Levine

It’s very interesting. And I haven’t looked at sugar futures, but I have a feeling that sugar – the [cost of] production of … or refinement of … sugar is probably less than corn at this point. And I wonder, you know, [if] it would be so much more cost effective, perhaps…. I think it was the reverse when they first introduced high fructose corn syrup – that it, at the time, was probably less expensive to produce than sugar. But it looks like the roles have reversed a bit?

Sean McGovern

Yeah. But I think the problem might come from scaling up cane sugar production as opposed to the cost of scaling up corn syrup on sort of an international … global level, because that’s what Coca-Cola and Pepsi and these guys are doing. And I think that’s probably more similar to … more driving what we’re seeing with the popularity of corn syrup.

Steven Levine

Very interesting stuff. So, this was great on corn futures! Both of you, thank you so much, again, for taking the time to do this!

I want to let listeners know that you can read more commentary and market analysis at IBKR Traders’ insight. It’s on our newly launched IBKR Campus at ibkrcampus.com. You can keep abreast there about topics we’ve discussed today. We’ve got a wide range of other news critical to your investment decisions. McAlinden Research Partners has a host of articles on several themes – from central banks and gold buying to issues involving cybersecurity. You can contact Rob Davis for more details at [email protected]. And for a full list of financial educational offerings, visit the IBKR Campus, where, as always, all of our educational material is provided to the public at no cost.

And until next time, I’m Steven Levine with Interactive Brokers.

LEARN MORE


WHAT’S FOR BREAKFAST – PODCAST SERIES

Time for a Coffee Break?

The War on Wheat – How Much Bread Is on the Table?

IBKR TRADERS’ ACADEMY

  • Courses On Futures
    • Introduction to Futures
    • Futures Fundamental Analysis
    • CME Micro WTI Crude Oil Futures
    • Understanding South American Soybean Futures
    • Introduction to Grains and Oilseeds
    • Hedging with Grain and Oilseed Futures and Options

MORE FROM McALINDEN RESEARCH PARTNERS

Leave a Reply

Note that all comments are held for moderation before publishing.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers LLC, its affiliates, or its employees.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Disclosure: Order Types / TWS

The order types available through Interactive Brokers LLC’s Trader Workstation are designed to help you limit your loss and/or lock in a profit. Market conditions and other factors may affect execution. In general, orders guarantee a fill or guarantee a price, but not both. In extreme market conditions, an order may either be executed at a different price than anticipated or may not be filled in the marketplace.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD). To receive a copy of the ODD call 312-542-6901.Multiple leg strategies, including spreads, will incur multiple commission charges.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.