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Ray Grabanski: Corn trouble?

Corn prices reversed yesterday after running to new highs, closing with sharp losses and forming a downside daily reversal on charts.  But this has happened before, most notably on the day of the November crop report, when prices reversed and dropped sharply over the next couple of weeks, only to regain its footing and rally to new highs.  What will happen this time?

While corn reversed lower yesterday on news that China had bought feed wheat from Australia instead of corn, the soybean and wheat market closed yesterday with small gains.  That doesn't correspond with a potential top-forming market in corn, as the other commodities did not follow the corn market lower. 

It's also hard to imagine that the market didn't not anticipate that at some point wheat would be used for feed instead of corn, especially since the US carryout of corn is projected to be smaller than the carryout for wheat.  

In fact, the job of the market might be to ENSURE that wheat be substituted for corn in feed bunks in some part of the world.  US wheat is all food quality wheat (mostly), while other parts of the world like Europe and Australia have more feed quality wheat than needed.  It's likely that wheat will be fed such that a smaller carryout of wheat will eventually ensue, while a larger carryout of corn is needed in the US 

than is currently projected.  

The market reacted strongly on the Australian/China news of a substitution of wheat for corn, but in fact that is likely to be repeated often before the end of the year in the US.  

There are reports that ethanol use of corn is at a pace that is going to require another few hikes by USDA similar to their January hike of 100 mb of corn ethanol use.  At the current pace, ethanol use would be 200 mb larger than USDA's revised January estimate.  That means that corn carryout would fall to near 500 mb, much too small to maintain a pipeline supply of corn.  That would certainly limit the corn use for feed.  Since feed use is the easiest to substitute wheat for corn, it's likely that  process will be repeated in various ways around the world over the coming 6 months.  After all, a carryout projection of 550 mb of corn and 800 mb of wheat seems out of whack, anyway!

So far, outside markets are holding up relatively well, with most markets at or near their two-year highs for now, or in the case of softs and metals, near their all time highs.  This makes it hard to be overly concerned with the corn markets breakdown yesterday in the daily charts.  

It will be interesting to see if corn can drop below its November high, what had been a still resistance point that should become support now that corn has broken out of its previous price range.  

Also noteworthy this week was a turn in the Argentine weather from one of major drought in the northeast to one where normal to above normal precip is occurring, and is continued to be forecast for the coming two weeks.  

That is a huge change from last Friday, which showed a continued lack of rain and heat in the previously dry Argentine growing region.  The change of forecast and potential weather pattern change across SAM over the long Martin Luther King holiday is a potential game changer.  We'll see how that bit of news play out the rest of this week, but we have to remember that we just formed new highs in grains yesterday, so it's a little early to say the trend has changed from the bull market of late, to a potential bear market.  


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