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Where’s This Corn Market Going?

Historically, rallies are scarce at harvest.

DES MOINES, Iowa --A lot of farmers are doing the same thing: trying to wrap up harvest and wondering when this corn market will turn around.

Monday’s Crop Progress Report pegged the U.S. corn harvest at 54%. Therefore, farmers now face the decision of selling corn for cash, storing, hedging new-crop for a future sale, or doing a combination of all above.

So, where is this corn market going?

Perhaps nobody really knows. What is worth knowing are the fundamental and technical factors that could determine the price of corn in the short term and long term.

On Tuesday, the December corn futures, the most highly active contract, traded at $3.46 per bushel. March futures traded at $3.60. There’s carry in the market, which analysts suggest could be the way farmers earn a few extra bucks on this year’s crop.

The first question that the market experts are trying to tackle is whether the seasonal low is in.

Is the Low In?

On Monday, the continuation chart in corn suggests trendline support at $3.34, 13¢ below the current level.

Jason Ward, Northstar Commodity’s director of grains and energy, does not believe the low is in.

“On October 12, the December corn futures hit $3.42 per bushel, the current low. Last week, we traded $3.43. And then we bounced, surprising a lot of people. Some investor just wanted to take some short profit on that corn position to give the market a kick,” Ward says.

Matthew M. Pierce, director of commodity consulting for Futures International LLC, agrees that the corn market’s low may still be ahead.
“There’s too much harvest yet to come, too much corn being stored on the ground that will be pushed into the pipeline early rather than later. And finally, the reallocation period for outside investors that will occur in early January points to the corn index lowering. So, investors will be forced to sell the front end of this market,” Pierce says.

Mike North, president of Commodity Risk Management Group, says that the seasonal low price range rests near $3.30.  
“This, of course, is a function of the September contract, which made its low at $3.28½ per bushel. Given that, prices will have the risk of returning to these levels over the course of the winter,” North says.  

North adds, “No one knows where price will go, but of late it has little desire to go anywhere. Basis remains wide . . . a signal that buyers have little interest in paying up for corn. This will act as a weight on any attempts by the market to rally.”

Buyers Lock In Supplies

While he thinks harvest needs to reach 60% complete before a bottom in the market is set, Ward is encouraged by plenty of end users loving this corn price level and loving their margins.

“As a result, they (end users) are locking in forward corn supplies. End users are not saying that corn and soymeal prices need to get cheaper. No, they are simply locking in and enjoying good margins,” Ward says.

Hog producers are on track to make an average of $18 to $20 profit per pig through August 2018, Ward says. “It’s remarkable. There is record production due to strong pork demand,” Ward says.

And, ethanol producers have been profitable for multiple years, as the corn price stays low. “Therefore, a lot of ethanol plants are in expansion mode. We need all of that because these corn yields, this year, are unbelievable,” Ward says.

Short-Term vs. Long-Term Price

Pierce sees the corn market, through year-end, gravitating lower on ample supplies, as cash corn looks for buyers.

“Long term (looking at Brazilian weather and Brazilian economic woes), I like corn for a rally once the investors’ portfolio allocations are finished in January,” Pierce says.

Meanwhile, Ward sees a short-term high of $3.56 per bushel, basis December futures, until the market breaks through it.

“Longer term, I don’t see it much higher than $3.56, unless we start hearing planting or crop-growth problems in South America,” Ward says.

For the March futures contract, Ward is pegging its high at $3.75, and the July futures contract at $3.95.

“If farmers have storage space, get out of the fall and sell carries. You will gain on the futures market’s carry, and you can capture a better basis down the road,” Ward says.

Meanwhile, North sees fundamental and macro factors driving the corn market.

“Short-term markets look rangebound. We see little by way of volatility or changing direction. Longer term, markets will have to sort out domestic acreage estimates for 2018 and reconcile those estimates with ongoing South American projections. In the wake of a weaker dollar, there is also hope that exports may improve. With China taking a softer approach to imports, however, we will not only need to be competitive in terms of exchange rate but also flat price,” North says.

Funds’ Buy Signal

The outside investors are sitting on very short corn positions totaling 170,000 contracts. This is the shortest they have ever been in any fourth quarter.

This begs the question: When will the funds start buying back those short positions resulting in huge support for the corn market to rally?

“Last week, we were really close to the price where they are going to start short-covering,” Ward says. “I think the price is $3.56, basis the December futures, where the funds start buying back their short positions. I think that because $3.56 is the highest price in October. They sold some last week at $3.55, to defend their short position.

“So, the buy signal will flash if the market takes out $3.56, basis December futures,” Ward says.

While the funds are indeed short, they have no reason to abandon their positions, North says.  

“The whole marketplace is awaiting some piece of mind-altering news that would change the established opinion about the corn markets.  One thing that could prompt such a change is South American weather conditions, but it will take months to develop that story, leaving the funds short for a potentially much longer time,” Ward says.

Alan Brugler, president Brugler Marketing & Management LLC, says the outside investors can remain in their positions a long time.
“The funds have a large net short position, but it can get larger if there is no farmer-selling for them to buy against, and/or end users start extending hedge ownership because they think prices are attractive (funds sell against commercial longs).”

Worst Time To Sell, Historically

Ward says the corn market has never placed a high in the month of October in the last 31 years. So, if you picked two months out of the year to never sell corn, they would be February and October.

“It’s a bad time to be selling. Yet, I think some growers will be forced to because they are short of bin space, while they still hold on to last year’s crops.

He adds, “If you are a farmer who is only 20% harvested, are you going to estimate those bushels that are still in the field? Or, are you going to do that at the end of harvest?”

North agrees that farmers may be between a rock and a hard spot, regarding selling off the combine.

“If farmers lack storage, selling may be a better alternative than commercial storage fees – if commercial storage is even available to them. If farm storage exists, however, the sale of corn forward into strong carry opportunities does make sense. Coupled with a call option, they can manage basis, carry, and flat price opportunities going forward,” North says.

Better Basis?

Brugler sees local basis prices to firm after early November as harvest slows down.

“Export sales could start to pick up, and the bin doors are going to start getting locked. It (basis) will firm quicker if futures drop toward $3.20 or $3.30, which they could if final yield grows from the October USDA number,” Brugler says.  

On the flip side, due to the large total stocks and smaller 2017/18 export program, basis is likely to remain weaker than a year ago in many areas of the country unless a new user or expansion has been completed in that area, Brugler says.

In Minnesota, there are better basis prices past January 1, Ward says.

“For January delivery, I locked in basis prices for customers at 35¢ under the Chicago Board of Trade’s futures price. For February delivery, basis prices have been locked in 30¢ under the March futures. And for March delivery, basis the March futures contract, I locked in 28¢ under,” Ward says.

Ward adds, “I’m telling customers, don’t leave all of this basis open for January, February, March, April, May, and June. You should be negotiating and locking it in now. Why? Because a lot of people are going to try and capture the carry, and that means all of these bushels are going to be carried into 2018. Once the calendar turns to 2018, there will be no incentive for buyers to push the basis prices.”

 

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