Each week the USDA assesses crop conditions, collecting data it then uses to issue a monthly estimate for the total yearly crop.
Just last month, this year’s corn crop was pegged at 14.79 billion bushels. That would have been the biggest corn harvest on record.
This severe drought (the worst since 1988) has caused the USDA to lower its yearly estimate by 12% to 12.97 billion bushels of corn. The world certainly isn’t going to run out of the commodity.
On the contrary… The USDA’s current estimate is still 5% higher than last year’s total crop.
However, as I demonstrated last week, that hasn’t stopped investors from driving up corn prices over the last few weeks.
In fact, the December 2012 future contracts I mentioned hit an all-time high of $8 per bushel yesterday. Prices have since cooled off, with corn futures for December 2012 now trading around $7.57.
Still, the move was historic. And I’m sure more than a few investors betting on corn dropping in price are a bit shaken right now.
If you’re one of them, don’t fret. Because no matter how much higher weather conditions push corn prices over the coming weeks, there’s one indicator that levels the playing field every year – without fail…
You Can’t Fight Mother Nature
You see, the one thing to know about commodity trading is that it tends to hinge on very specific growing cycles.
Crops are planted in the spring, grown in the summer and harvested in the fall. It’s that simple.
So under “normal” weather conditions, prices for each crop will reach their highs and lows at about the same time each year.
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This is called “seasonality.” And since it’s one of the strongest indicators of where a crop is headed down the road, we can use it to maximize our gains when playing the commodities market.
Take a look at the chart below, which shows a typical seasonal pattern that the price of corn follows throughout the year.
From that point on, corn prices will usually decline all the way to harvest time in the fall.
Severe weather conditions are known to affect this pattern, of course. And there’s no doubt that they’re affecting corn’s seasonality today. Based on the chart, corn prices would ordinarily be on a consistent downward trajectory by now.
Harsh weather or not, you can’t fight seasonality.
When it comes to price action in the long term, the current condition of the crop isn’t the only factor. In the end, the harvest will come, crops will hit the market and prices will eventually come down.
Only, in this case – with corn prices out of sync with their seasonal schedule – the prices are still likely to drop, just a bit later in the year than usual.
Bullish investors be warned.
Ahead of the tape,