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A shift to the demand side
New crop corn prices continued to spiral lower Thursday on heavy selling pressure, with the Dec contract settling at its lowest level since December 5, 2008. Spillover selling from the weaker crude oil market combined with friendly growing weather, bearish technical signals and the second highest planted acres total on record all served to hurt corn on the day. If the weather stays benign, more losses could well be in store next week, even though new crop prices are already more than $1 a bushel off their early June highs of over $4.70.
Many farmers appear to have been stunned by the USDA's acreage projections from Tuesday, and several even doubt their veracity. For our part, we have been stating for the past several weeks (months even) that farmers always tend to plant what land they have available, and so saw no reason why they'd plant less overall acres this year versus last year - given that prices of both corn and soybeans have been very strong this Spring. As a result, even with the poor weather we saw, we had expected the overall corn planted acres number to be above the March 31 estimates, and so it has proved.
Now that we appear to have 87 million planted acres of corn developing amid quite friendly conditions, this market's focus will shift to the demand side of the equation. Certainly the recent heavy corn price slide has improved the economics of several corn users, but it is important to note that large-scale demand for corn cannot be switched on and off like a light switch. Hog producers, for instance, have been badly damaged by the consistently strong corn and soy meal price over the past several weeks, and so may take a long while to fully recover a large appetite for corn again. The same applies in the cattle industry, although ethanol producers do appear to be ramping up interest as gas prices hold up.
Overall, corn looks set to have a tough time putting on a sustained rally any time soon without the help of serious weather worries. So, for those producers who neglected to make sales and place hedges while prices were above $4.50, please ready yourself to catch up on sales whenever prices do rally over the coming weeks.
Soybean prices endured a choppy ride on the day, with Nov futures getting hit early on spillover selling from the outside markets before recovering later in the session as investors and traders continued to wade in on thoughts of tight supplies and continued strong demand. A pre-open report of a 660,000 metric ton sale of new crop beans to China gave the bulls fresh fuel early on, but it was clear that buyers lacked real conviction today as Nov prices settled nearly a dime lower.
Looking forward, now that the USDA has penciled in 77.5 million planted acres - the highest ever - it's unclear how much more upside room this market has in new crop prices. Clearly there’s still tightness in nearby prices, but given that there's a more than $1.50 premium in August prices versus November, any buyer that can afford to wait until new crop supplies emerge will do so. Meanwhile, aside from China, export sales announcements are very quiet, so once the Chinese buying spree stops prices have the potential to grind lower pretty quickly.
This all adds up to us recommending - once again - that producers who have not yet made a decent amount of new crop sales to look to do so very soon, or at least get caught up on hedges. The risk is more to the downside than the upside from here, so don’t stand by and watch a great selling opportunity pass you by.
December CBOT wheat prices continued to spiral lower and recorded their fifth consecutively lower weekly close. Long liquidation by stale longs while the US winter wheat harvest cranks up continues to be the main source of pressure, and from our perspective there’s no reason to anticipate a major rebound any time soon. Diminishing feed demand domestically and overseas is muting overall demand, while growing global stockpiles continue to keep outside interest from emerging.
There's certainly the possibility of fresh investor allocations into wheat over the summer that may offer a floor to prices, but until the demand side of the equation heats up, wheat prices look set to remain the least likely to succeed among its CBOT class.
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Gavin Maguire is director of E Hedger, a commodity trading and marketing firm based in Chicago.