Corn’s multiple uses and relationships with other commodities creates spreading opportunities according to Paul Cretien.
Corn is a versatile commodity both in terms of its multiple uses and as a trading instrument. Corn futures can be traded against the rest of the grain complex–soybeans and various wheat contracts–or the meat complex that uses corn as feed.
Once you factor in exchange traded funds on all the underlying commodities and the combinations grow exponentially. Corn can be used in several pairs plays using the Teucrium Corn ETF (CORN). As a grain, corn may be spread against wheat, or Teucrium wheat ETF (WEAT). As a cattle feed, corn is in play with iPath Dow Jones UBS Livestock Total Return ETN (COW). Corn is also the base of the biofuel ethanol, which is represented by the Nasdaq stock, Pacific Ethanol ETF (PEIX).
A chart comparing the ETFs CORN and WEAT (below) shows that there is a high correlation between the two ETFs. Several times over the last 12 months price diverged creating a strong reversion-based pairs trade. The best example was from August when the divergence grew extreme providing a strong pairs trade signal. That opportunity was open from July through September before the ETFs returned to form. Otherwise the two grain ETFs have price changes that are too close together to form a spread trade. The chart indicates that when the two ETFs separate in the future, they will close the gap and come back together in a reversion play.
A chart comparing the ETFs COW and CORN (below) exhibit frequent separations in pricing that would be useful in buying the lower priced ETF and selling the one that is temporarily higher-priced. A classic opportunity existed for several weeks in April and May of 2018 and is definitely something to watch for in the futures markets for livestock and grains because ETF prices reflect near-term futures.
The chart comparing Pacific Ethanol (PEIX), CORN, and the United States Gasoline ETF (UGA) shows a widening gap between CORN and PEIX. The stock’s price is currently $1.14 and certainly could gain when the spread narrows. We are on the verge of spring and summer travel season when the use of gasoline and accompanying ethanol will increase and prices tend to increase based on the combination of higher demand and supply shortages due to the imposition of seasonal blends.
As the chart shows, gasoline (UGA) is much more powerful in producing price change on the ethanol stock, PEIX, than is the change in the price of corn. In this case, corn is the stable member of a pairs trade with ethanol or a stock based on ethanol. A reversion trade between UGA and PEIX should be considered.
Corn is a versatile commodity effects may other commodities and markets and an understanding of its price action and correlations, can create various opportunities to trade.