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$7.20 ceiling for 2012 corn, analyst

Agriculture.com Staff 01/06/2012 @ 1:59pm

Entering 2012, the foundation of fundamentals we have seen since 2008 continues.  

The planting and growing seasons will begin with very low ending stocks inventories of corn and beans. Expect a spring planting rally. Corn and bean prices will rise to steal acres from spring wheat, oats, hay and alfalfa to ensure enough acres are planted so supplies will not shrink to dangerous levels if an untimely drought materializes. 

Also continuing will be mandates for producing corn-based ethanol and soyoil for bio-fuels. And, the demand from emerging market food needs, particularly for the Chinese population, is not going away. Finally, let’s not forget the billion-dollar index and trend-following funds that dominate monthly trade.

Outside Money

I believe funds will have the biggest price impact in 2012; they create profits to take profits. Since 2008, there has been a change in the roster of grain traders. Years ago, yearly price action was controlled by large individual traders and $5- to $10-million dollar day-trading agricultural trading funds. Commercial interests – exporters and processing companies – control seasonal trends, and they are still out there. They publish reports talking of more acres to be planted, and how, with good weather, ending stocks inventories will soar. This suits their needs as end users and processors – they can only profit from lower cash prices. Note that their reports conveniently leave out future world demand indicators, and demand is the real market driver, not supply. For instance, in three of the last four years we have seen record acres planted, while futures pricing has also soared to record or near-record levels.

Today, it’s the index and trend-following funds that are benefitting from a 2007 law allowing them to trade commodities, once considered too risky. Their pattern is make profits then take profits. Index funds have hedge fund account status with no trading limits on long-held positions. They can only buy long the market, leaving selling only as a profit-taking result.

This makes for easy trading decisions. Funds buy the beginning of each month into the uncertainty of each USDA monthly grain report, released between the ninth and eleventh of the month, then take the profit before the month ends.

In eight out of 12 months in 2009, futures prices rallied to the high before the second week of the month and established lows in the last half.

Ten out of 12 months in 2010 had the same pattern and in 2011, this occurred in nine of the first 11 months. Now you know who they are and their intentions.

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