This week saw a sharp rebound in corn futures on the Dalian exchange, with far-month contracts surging. This was driven partly by the El Ni帽o's broad impact on agricultural products, but more critically, it reflects a shift in the domestic market from a "weak reality, weak expectations" scenario to one of "weak reality, strong expectations." The expectation gap trade has been unleashed against a backdrop of supportive external markets.

Reviewing our recent market focus reports, we previously highlighted in "Corn: Wheat Reserve Purchase Lands, Corn Finds Its Bottom" that with wheat support policies in place, we anticipated valuation adjustments for near and far month corn contracts, as the previous three-month decline was sufficient in both magnitude and duration. We also noted in "Diverging Agricultural Products Amid Weather Disruption (V): El Ni帽o's Initial Impact on Grain Markets" to watch for weather effects during August's critical corn growth phase and Australian barley conditions, which could trigger an expectation gap in imported grain supplies towards year-end, impacting C2701 and C2703 contracts. Our report "Starch: The Final Game" recommended a CS9-11 reverse spread strategy.

The current rally is a confluence of three bullish factors: production area weather premiums, a strong external market transmission, and policy support forming a floor. This is a sentiment correction after overselling, not a fundamental shift in supply-demand dynamics.

Where the rally finds its roots

First, the external environment has turned decisively supportive. A recent JPMorgan report, "Food Security is National Security," used the "Five Ws" (War, Weather, Warehousing, Water, Waste) to warn of a global food crisis. It projects that a super El Ni帽o combined with Strait of Hormuz disruptions could push global food inflation from 2.8% in H1 2026 to 5% in H1 2027. This report ignited the domestic grain sector, lifted CBOT corn prices and import costs, and provided a comparative price pull on the Dalian exchange. Meanwhile, NOAA has raised the probability of a "very strong" autumn-winter El Ni帽o to over 90%.

Second, wheat support policies are establishing a "policy floor." Henan province initiated the minimum purchase price plan for wheat on August 11th, stabilizing wheat prices. The narrowing wheat-corn spread has reduced the appeal of wheat as feed substitute, redirecting some demand back to corn. However, less than 30% of the wheat supply meets quality standards, limiting the strength of this support.

Third, rising planting costs are solidifying the far-month contract's floor. Land rents for the 2026/27 season have increased by 100-200 yuan per mu. In the Northeast, the delivered cost to port is estimated at 2200-2250 yuan/ton. With futures prices now near this cost floor, further downside appears limited.

Capitalizing on the margin of safety

Earlier this month, the agricultural product index bottomed and rebounded. Corn followed with a significant rally this week, particularly in far-month contracts. This was fueled by El Ni帽o's broad impact on the agricultural complex and the domestic shift from "weak reality, weak expectations" to "weak reality, strong expectations." The expectation gap trade has been corrected amid external market resonance. Previously, C2611 and C2701 contracts had fallen below the new season's planting cost, offering an attractive long margin of safety from a valuation perspective. Furthermore, grassroots information suggests that yields in Xinjiang and the Northeast (especially Liaoning) are not looking particularly optimistic this year. The market will continue to monitor weather conditions in the main production areas of the Northeast and North China over the next month.

In terms of product price ratios, the significant rally in soybean meal and No. 1 soybean has sharply widened the soybean meal/corn and soybean/corn spreads, creating arbitrage opportunities for new season corn contracts trading below planting costs. Given these factors, we recommend maintaining a long bias until the main production areas in the Northeast and North China begin large-scale market supply. For strategies, we suggest focusing on widening the CS-C2611 and CS-C2701 spreads, which offer a strong safety margin. The driving force behind this is the anticipated profit recovery from reduced starch industry operating rates, inventory drawdowns, and pre-holiday stocking.