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A Bullish Argument for the Corn Market

Corn futures hit multiyear lows.

In this week’s Perspective, we’ll look at the bullish argument for corn and the variables that could drive prices higher.

Corn futures in recent weeks are trading near contract lows, even multiyear lows for this time of year. The question is whether or not we’ll see prices rally. Price recoveries the last three years have been relatively minimal and have disappeared quickly. What might be different this year?

Bullish traders argue that the corn market is poised to take off, and simply waiting for positive news. The strongest supporting factor may be the significant build-up of short positions seen on the weekly Commitments of Traders report.

Each Friday, the Commitments of Traders report tells us the net long or short position of managed money as of the previous Tuesday. Managed money is net short well over 300,000 contracts. At one point this past week, they were thought to be short over 380,000 contracts.

The bullish argument is this: when funds see a reason to liquidate (buy back) their contracts, we could see upward pressure on prices. If they look to exit quickly, having to pay for willing sellers, a steep price recovery could occur in short order.
 
Should managed money go from net short 300,000 contracts to, say, 200,000 long, this would be significant and bring a massive turn of events. While this seems unlikely today, adverse changes to crop size (whether perceived or real) could quickly send prices spiraling upward. And that brings us to weather and yield estimates.
 
Weather is the most important variable that affects crop size. Near-term weather forecasts suggest that fieldwork will be limited through the first two weeks of May. If planting delays continue, the risk of a late-planted crop increases. Historically, a corn crop planted after mid-May has a greater chance of a yield drag. Additionally, most of the crop will be bunched up in the same window of maturity. This could be a boom-or-bust scenario, as the impact of weather during the growing season is heightened, especially during the pollination and ear-filling stages. In other words, with a later-planted crop, weather could have an even greater impact and pronounced effect.
 
For five consecutive years, corn producers have done an outstanding job of producing an abundant crop. The final yield estimate for each of these years has been above trendline (expectations). Only one other time in history has that occurred: 2004 to 2009. The current attitude in the marketplace is that yields are expected to be at trendline or higher. With no reason for rallies in sight, funds will stay short. However, moving forward, if yield expectations change, then a price rally is likely.
 
World population continues to grow, and so does the need for continued abundant crops. It is estimated that demand for corn in the U.S. grows approximately 250 million bushels annually. The Northern Hemisphere produces 75% of the world’s corn production, and current weather is a factor. Carryout is near 2 billion bushels. Even though this is below last year by nearly 100 million bushels at this time, supply is believed to be large enough to keep price rallies in check. That shows in the current stocks-to-usage figure in both the U.S. and world at the ninth highest in the most recent 20 years. However, with increasing demand, that ratio could change quickly. In the end, there is little room for production error.
 
End users have been buying hand-to-mouth for several years. If weather becomes an issue this year, we would expect the just-in-time inventory approach to quickly change. Long-term buying strategies will emerge to secure low-priced inventory.
 
Prices often move on PMA (perception, momentum, attitude). Today, none of these variables are favoring higher corn prices. Changes in expected production could bring a domino effect of events, driven by P, M, or A. Typically the order of events would be 1) perceptions of crop production change, 2) attitudes turn bullish, and 3) prices charge higher, building upward momentum.
 
It’s a crazy time. One week it seems that no one wants to own corn, and the next week, it can’t be owned fast enough. Don’t let yourself become complacent. Consider taking advantage of low prices now, and buy supplies for the remainder of the year, and possibly for next year. After all, downside price risk may be limited, while upside risk is unlimited.
 
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Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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