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Analyst: The Risk Is Shifting to End Users

After the August 12 Supply and Demand report, grain prices had plenty of news to move lower, and yet finished the day with gains. In other words, the market looked at the very bearish report, which indicated record yields in both corn and soybeans, and then dismissed it. While the market may be short-sighted dismissing the report, there is a bigger and longer-term signal from the postreport trade activity. That is, prices have likely moved low enough for end-user buying to be more aggressive on price dips, and farmer selling to be likely unaggressive on price weakness.
In 2014, December corn bottomed at $3.19 on October 1 and, within 30 days, was trading over $3.75. That was a record crop year. Shortfalls of corn supplies in Brazil this year (due to the late-season drought) helped to start the ball rolling on declining world inventories midsummer. Yet, near-ideal conditions for this year’s crop in the Northern Hemisphere (particularly in the U.S.) have kept prices on the defensive the last six weeks, with new lows seen after the USDA report. End users are taking advantage, with strong commercial buying noted on the Commitment of Traders report. The bottom line is simply that farmers are not likely to sell at current prices, and that end users (whether they be foreign buyers, feed users, or ethanol producers) will likely be buying more aggressively. While there may be no immediate near-term urgency to buy, keep in mind that futures under $3.50 is somewhat rare.
Demand for corn continues to grow, and this was reflected on the USDA report, in which total estimated usage for 2016/2017 jumped 5.9% to 14.50 billion bushels, a record. In other words, it will take big production in the years ahead to meet demand. If the price of corn or the cost of inputs doesn’t provide incentive for farmers to aggressively plant corn, one has to expect that, at some point, a less-than-ideal crop will occur. Weather is the most dominant factor affecting crop size, and this too, could have a significant impact in the year ahead. After four consecutive years of outstanding crops following the drought of 2012, one has to wonder if the odds aren’t beginning to grow (perhaps exponentially) against a fifth year of outstanding crop.

Need Marketing Advice? Get exclusive access to grain marketing advice from Al Kluis of Kluis Commodities.
The bottom line is planning. Those who use corn have to realize that corn prices are very likely in the lower third of its yearly price range. Good business practices dictate purchasing commodities when they are plentiful so you are prepared for the years when they are not.

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