Below is an excerpt from our most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!
The corn market seems to have already “priced in” a conservative demand outlook for the rest of this year and next year and a relatively large crop for this summer. While many other commodity markets have moved well away from depression-type pricing, December corn is up just 30 cents from the 2009 lows. Traders see the early weather conditions as ideal and current ending stock projections as ample. With the fast start to this year’s planting, the market seems to have become complacent regarding the possibility of a tight supply situation if we see “less than perfect” weather for the coming year. The market saw a spike higher on April 7th on rumors of China buying corn, but the market quickly retreated when the buying could not be confirmed. However, just the thought of China shifting from an exporter to an importer may have been enough to turn the psychology of the market from bearish to bullish. We believe China will be an importer of corn sooner or later and that the odds of it happening this season are improving significantly. Demand estimates are likely to be revised higher for US exports, US corn used to produce ethanol and even for livestock feed, as profitability for livestock producers is soaring.
On top of demand issues, we feel that the market may be basing its yield expectations on the strong pattern of the past two years under what have been “ideal” growing conditions. A return to a more normal weather pattern might lower yield expectations and result in a tighter supply. If there are any weather or demand issues that surface which suggest that prices are just too cheap or that supply will tighten, the technical set-up for the market is such that corn prices could quickly turn around much more bullish.
Keep in mind that the last Commitment of Traders report showed a near-record net short position of 62,000 contracts held by trend-following fund traders. Any turn higher in the minor trend will be enough to spark short-covering from this group of traders.
Index fund traders have exhibited a steady buying trend, moving from a net long position of around 225,000 contracts as of early 2009 (which was the depth of the recession) to a record high of 459,000 contracts recently. There are many types of index funds, and corn seems to be included in most of them. It is a food, fuel, feed and industrial commodity. Index fund participants tend to be long term investors and are unlikely to exit their positions until there is a general perception that inflation has peaked. If anything, corn is likely to attract increased buying from fund traders in the future with the proposed corn-only ETFs likely to attract new investment money ahead.
A review of the new crop supply/demand situation may be in order. The enclosed table shows the current outlook for ending stocks given various yield scenarios for the 2010/11 season. Many traders see trendline yield this year near 160.5 bushels per acre. If we plug in the USDA prospective plantings report estimates and some conservative usage estimates, we start the season with 1.899 billion bushels and end the season with 1.693 billion. However, the University of Illinois makes a very strong argument that recent years have seen better than normal weather (with a lack of heat in July and above normal precipitation in June and July) and that if we see normal weather for the Midwest this year the average yield will be closer to 157 bu/acre. At this level, ending stocks would slip to just 1.4 billion bushels with a stocks/usage of just 10.6%, the second lowest in the last 14 years. If we assume a yield of 153.3 bushels per acre (the average of the past five years), it would leave ending stocks at just 1.1 billion bushels and a stocks/usage of just 8.3%, the second lowest since 1973. We are not predicting lower yields; we are just trying to point out that a high yield will be necessary this year to avoid a tight situation. None of the estimates above call for exceptionally poor weather, just slightly under trend.
As of April 18th last year the corn crop was only 5% planted, but excellent weather this year has boosted planting progress to 19% complete. The 10-year average for that week is 10%. The record pace was set in 2004, and that was the only other year besides last year in which yield managed to exceed 160 bushels per acre. Studies on yield, however, do not show much of a correlation between early plantings and yield. June and July precipitation and the temperature that occurs during pollination are the dominant factors. In 2004, the weather was excellent for the entire season, and the December 2004 corn contract posted a contract high on April 8th at 341 1/2 before posting a contract low at 191 on December 2nd.
Signs of better demand ahead due to the expanding global economy and ideas that China will eventually import feedgrain are factors which could quickly bring about a need for the market to build a weather premium. In the last 13 years, China has been a net exporter of corn with amount ranging from 5 to 15 million tonnes (197-591 million bushels) common. With poor weather for planting corn this spring, a drought in the southwest of China and the possibility of expanding corn usage for the coming season due to more corn usage for high fructose corn syrup, starches and expanding livestock production, China may shift to being a net importer for the coming season.
