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Bearish Argument for Corn
Last week we talked about the bullish argument for corn. Knowing the market can go either way, this week we're looking at the opposite side: the bearish argument.
Corn futures have been in a sideways-to-lower price trend since fall. Managed money has been aggressively short, and has set a record pace for selling into the late April and early May window. All of the uncertainty with growing a crop lies ahead, yet managed money stays short. It may be as simple as three words: supply, supply, supply. Despite weather scares and a poor start to planting, the reliability of crop production in recent years seems to be the dominant factor in holding prices down.
While the U.S. dollar, trade, and competing commodities all have an impact on price direction, nothing compares to the most important factor: weather in the Northern Hemisphere. This region grows 75% of the world's corn crop. If this year's weather is conducive for the planting season and the growing season, there is little reason for a price rally. The March 29 Stocks and Acreage reports were both negative, with corn acres expected to increase 3.6 million more than a year ago.
The market has a tendency to focus on the net supply of corn at the end of the marketing year, which ends August 31. This is called ending stocks. Currently, this is projected at just over 2 billion bushels. By all accounts, this is termed adequate. By adding 3.6 million acres, private forecasters suggest ending stocks could increase close to 2.2 billion for the year ahead. These figures will likely keep speculators on the sidelines and end users buying only as needed.
When carryout is as large as it currently is, usually managed money will stay defensive, remaining net short. As long as there is the perception that the upcoming crop yield will be at trendline or higher, funds are likely to keep their short positions. There is a carry charge (cost of storage) in futures. As long as cash prices remain steady or lower, managed money will likely stay put, selling the carry and anticipating back-month futures to eventually drop to the cash price.
There's an old saying: "You only need to feed a bear once a month, but you need to feed a bull daily." This saying has merit when projected corn carryout is large. Corn futures are trading within 10 cents of their contract low. Farmers faced challenges prepping fields this past fall, due to adverse weather and now a wet and cool spring. Yet, futures have failed to respond. The notion that late planting does not matter has gained traction in recent years, keeping funds from covering short positions. The general belief is that, until mid-May arrives and farmers are then proven to be very late in planting, the market is premature to develop a price premium.
Two other items are keeping traders on the defensive. 1) A failure to reach trade resolution with China. This creates the mindset that, even if a deal is completed soon, it won't have much impact. The U.S. can't move enough inventory overseas in the near term. 2) African swine fever could be more impactful than most would believe. Some are suggesting that as much as half the Chinese hog herd could be affected. This could mean a reduction in corn usage and hope for sales to China. Rallies could be limited. When they do occur, consider them an opportunity to sell ahead.
If you have any questions or comments, contact Top Farmer at 1-800-334-9779 Ext 129.
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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