The busiest and most volatile season for corn is usually late summer and early fall as harvest numbers come in and give traders a clear perspective on supply and demand balance, and that is exactly what is happening in the corn market.  Currently in mid-September, corn is trading very strongly at two-year highs above $5 and price has reached a high above $5.20.

Most analysts are expecting the $6 price level to curb demand and act as strong resistance.  A clean break and close above the $6 level would technically open the door for much higher prices, but that is not likely to happen.  The strong bullish movement in corn is a direct result of several factors that are pushing prices higher.

China's increased demand

The global recession of the last two years has transformed the Chinese economy.  It is no secret that China has become more than an emerging market over the last ten years.  In fact, China’s economy has grown so fast that it has now become one of the world’s largest and most powerful economies, and many economists and experts agree that China’s GDP will overtake the United States by 2030 or sooner.  The heartbeat of China’s economy, however, is exports.  Thus, China is heavily dependent on foreign demand.  If foreign demand dips, then China’s economy faces major challenges.

During the last two years of global recession, China realized it cannot rely on its exports.  As global recession devastated developed nations such as the United States, England, and the EuroZone, the demand in these struggling countries for Chinese goods and services likewise fell.  Therefore, China realized that its domestic market needed to be developed.  A fully developed domestic market would free China’s economy from relying so heavily on exports.

As China bolsters its domestic market, one area predicted to grow heavily has been China’s imports of corn.  In fact, China demand is expected to surge exponentially over the next 5 years.  This increased demand out of China is one reason corn prices have risen this year.

Frost in Northern China

There have been widespread rumors of severe frost in Northern China that may be destroying corn yields.  Frost is often a commodity's worst enemy, and many analysts are expecting this frost in Northern China to negatively affect Chinese yields.  This decreased supply in China will subsequently drive up corn costs around the world as global supply continues to fall below demand levels.

Weak Midwest harvest

The Midwest harvest in the United States is currently facing some challenges as heavy rainfall has caused a pause in harvest yield reports.  Reports coming in, however, have tended to disappoint to the downside.  Although places like Indiana are posting positive reports, many Midwestern states are reporting yields of around 10 to 15 bushels per acre lower than last year.

This combination of increased demand around the world for corn and a weakened supply due to frost in Northern China and disappointing yields in the United States is causing corn prices to run up in this current bull market.  Prices have now topped out at a two-year high above the $5.20 area, but a continued run up is likely, especially if the Midwest harvest yield reports continue to disappoint and show weakness to the downside.

Many corn exporters engage in currency tradingin order to hedge against wild currency exchange rate volatility that can undermine bottom line profits.

Jennifer Gorton is the content manager of Forex Traders.