| June 18, 2010 | Archived Issues |
Will The Corn Market Get Interesting?
The USDA's June 10, 2010 World Agricultural Supply and Demand Estimates (WASDE) lower corn carryovers surprised market analysts. Both old crop (2009-10) and new crop (2010-11) corn ending stocks came in lower than the pre-report ranges of trade estimates. Although record new crop corn production is forecast, use is projected to exceed production. The USDA's 2010-11 corn ending stocks were projected to be 1.573 billion bushels. This was down 245 million bushels from the previous projection of 1.818 billion bushels and would result in a corn carryover that is slightly below the 10-year average of 1.582 billion bushels. World 2010-11 coarse grain uses are also expected to exceed production and result in a slight decrease in carryover.
Tighter carryover supplies usually suggests higher prices and corn futures prices have moved about twenty-cents higher since the June WASDE report was released. But risk and uncertainty remains. Some of the factors to watch are:
Weather: Until recently the markets appeared to have accepted that the abundant moisture was producing ideal corn growing weather. Much of the crop was planted timely and got off to a good start. Weekly crop condition reports have indicated crop conditions are ahead of last year. No changes were made in the USDA's June projections, but higher than trend line yields seem possible again this year and production may be more than is currently forecast. However, maybe there has been too much of a good thing (moisture). While crop condition ratings remain high, the rating slipped somewhat in Missouri, Iowa, Illinois and Ohio in this past week's USDA Crop Progress report. Heavy rainfall and flooding in the Corn Belt is causing crop losses with the amount of damage yet to be determined. Another weather concern is: "what if the rains just "shut off?" Some weather forecasters are saying that a fading El Nino in the Pacific may lead to La Nina conditions and dry mid to late summer conditions in the Midwest. This could also threaten production. As always, weather has the potential to provide market volatility with sharply higher or lower corn price reactions.
Acreage: Besides yield, the other factor determining production is acreage. The USDA has been using the March planting intentions for crop acreage to forecast production. Many analysts have believed that the actual acreage will be higher. Excellent planting conditions in April allowed much of the crop to be planted early. Historically, early corn planting usually leads to more corn acres being planted. But, when the April planting window closed, wet conditions have prevented many producers from planting or even replanting drowned out crops. Recent flooding has also had an effect. With the large expected use expected in 2010-11, a large corn crop is essential. Current USDA corn acreage projections, or lower, would be supportive to corn prices while a larger acreage could be negative. Market analysts will be anticipating the June 30 USDA Acreage report to provide additional production information.
Use: Since there were no changes in the USDA's corn production forecasts, the supply/demand changes were all net increases on the demand side. Increases in ethanol use for both old and new crop along with an increase in 2010-11 export projections contributed to the lower ending stocks projections. No changes were made to the feed and residual use expectations in the USDA's new crop projections. Higher feed use seems unlikely since increased supplies of low quality wheat and increased DDG production provide corn feed use competition, but residual use is difficult to predict. While most agree ethanol use of corn will remain solid, some analysts question whether it will reach the levels currently projected by the USDA. Chinese demand adds uncertainty to export prospects. Chinese soybean demand has had a dramatic effect on soybean exports and the prospect of Chinese corn demand creates excitement. But the amount of corn China may actually import remains unknown. The possibility of growing domestic and world corn demand is attracting market attention.
Economic Factors: A number of other outside market factors continue to influence corn prices. Weaker stock prices and strength in the dollar have often translated into weaker corn prices. In contrast, strength in the stock market and a weaker dollar has tended to support corn prices. The connection between energy and ethanol demand continues the relationship between oil price and corn price. Declining oil prices in May contributed to lower corn prices during the same period. Stronger oil prices so far in June have helped support corn prices. The actions of fund traders and market speculators also continue to provide market uncertainty. Any of these economic or market factors represent potential downside risk or upside opportunities.
Price Action: Throughout most of the spring, the prospects of another record crop in 2010, increasing corn carryovers and excellent growing conditions have contributed to down trending corn prices. But decreasing corn ending stocks may support prices, which was reflected in the USDA's 2010-11 price forecast. The season-average farm price range was increased ten cents and is now expected to range from $3.30 to $3.90. Although corn futures prices have recovered significantly from the early June low, they are only back in the April-May trading range. It will take a breakout above the range (about $3.95-$4.00 December 2010 corn futures) before any uptrending rally can be established.
The USDA's June projections only suggest that corn prices may have found support, but use caution about becoming overly optimistic. While new crop use could exceed production, corn supplies remain more than adequate. New crop demand looks promising, but could still disappoint. Crop condition reports still suggest another record size crop is on the way. Domestic and global economic concerns continue. However, as pointed out, a number of factors bear watching. The USDA's current projections do provide an optimistic demand outlook. The June 30 Acreage report and the surveyed August 12 Crop Production report will be expected to provide a more accurate look at corn production and supply.
The corn market may be getting interesting, but so far it is just that-interesting. Although corn demand looks solid, it will likely take supply concerns to trigger a significant price rally. Summer price rallies do occur and they are often a result of production or supply concerns. These rallies can provide higher than expected pricing opportunities. However, they also often reverse abruptly. Capturing higher prices requires being prepared to move quickly. For those wanting to prepare for a possible rally, buying out-of-the-money call options might provide the confidence need to stay with current marketing plans. Planning to use trailing stops to trigger additional sales during a rally is another alternative strategy to consider. Although the possibility of a rally should be recognized, current projections do not necessarily support it and counting on an extended price rally is risky. Market plans should not be abandoned. For now, price targets should continue to be prices in the upper portion of the USDA's projected price range for adding to sales.