Would Even a Crowbar Move the Corn Market?
DES MOINES, Iowa -- The corn futures market has acted like it barely has a pulse for a long time. For some reason, it just is not moving away from the $3.50- to $3.60-per-bushel range that it’s stuck in.
In fact, in recent weeks, the trading range has been a few cents. That’s it!
In the last month, corn prices are up 2.0%, according to data from Finviz.com. For the year, corn is up 2.08%. It’s up and that is positive, right? After all, the soybean market for the year is down 4.48%.
Yet, when you look at the lean hog futures market, it’s up 26.0% for the year, feeder cattle prices are up 21.4%, and even the oats futures market has jumped 24.0% on the year.
Because the world is sitting on a lot of corn supplies, the market is pinned under heavy pressure, according to market watchers.
Looking at the percentage change in prices from the beginning of the year, this has been one of the smallest trading ranges on a percentage basis going back all the way to 1980.
Mike Rusch, regional sales director- ag/commercial at Stewart-Peterson, says that it has been three decades since the market has moved this little.
“Even though the absolute changes are still larger now, compared to the underlying value of futures, we’re seeing a smaller trade range than in 1985. The main factors include the bigger-than-expected U.S. 2017 crop and traders unsure and unwilling to push market until a better picture of 2018 unfolds. I view this as the marketplace in general lacking any solid opinion or willingness to put a stake in the ground,” Rusch says.
Al Kluis, Kluis Commodities, stated recently in a weekly Successful Marketing newsletter that the corn market has been grinding lower in the last few weeks.
“The market is absorbing the last of the corn harvest. Many farmers ran out of storage and were forced to sell the last of the bonus bushels or pay storage,” Kluis stated to customers.
He added, “The trade attitude remains quite bearish, but I see some positive signs. I like the way the bull spreads are starting to work in the corn market, the improving cash basis, and the fact that funds are holding a short position of 210,000 contracts of corn.”
This large fund position sets up a significant rally now if December corn can get up and have a weekly close over resistance at $3.44 per bushel, Kluis says. So far, the December corn futures are going in the opposite direction.
Corn Chart Analysis
Kluis says that the corn market goes through three trends every year.
“The uptrend is defined by a series of higher highs and higher lows. I have noticed that prices get extremely volatile when prices finally reach the top. Prices then go into a downtrend, making a series of lower highs and lower lows,” Kluis stated to newsletter customers.
He adds, “Once the bottom is in place, you will go into a sideways trend when the markets put in a series of M’s or W’s on the chart.”
The spike down two weeks ago at $3.36 looks like an important secondary low with prices holding above the August 2017 and August 2016 lows, Kluis says.
“The corn market put in an important low on August 31, in both 2016 and 2017. The next major low came in on December 1, 2016. Now watch for the next major low on December 1, 2017, which is the one-year anniversary of the day corn prices put in a secondary low. The firming cash basis bids and narrowing spreads are also positive signals for the corn market,” Kluis stated.
HISTORY OF SLOW MOVEMENT
Although farmers, in the past decade, may have gotten used to the corn market moving in bigger chunks of dollars and cents, a longtime Chicago Board of Trade floor trader, choosing anonymity, says it feels like the olden days.
“Yes, there is precedent,” the floor trader says. I studied three eras when the corn stocks-to-use ratio was 15% to 19%, suggesting ample stocks. All three eras traded below cost of production for several years. The crop subsidy made up the difference to the farmer.”
He added, “Specifically, in the early 1990s, I was a clerk on a phone on the grain floor. We had a 3¢ tic trading range, and the market would close unchanged.”
What’s keeping the market acting like it’s near death is the fact that it has to carry large grain stocks, much of which is in on-farm grain bins.
“Once the insurance subsidy has been paid, the farmer is on his or her own,” the floor trader says.
Also, large feed grain competition from feed wheat out of Russia and large internal stocks in China share the blame for a bearish market sentiment, the floor trader says.
“As stocks build, eventually the market has to signal the farmer to stop growing corn acres. That is what you’re faced with in low basis areas like the Dakotas,” the floor trader says. I have model corn lows near $3.22 (futures) and model highs near $3.70. If Brazil has big cuts in its second corn crop, (planted in March), we can get a little more optimistic.”
A RALLY TO $4.50?
It’s not that uncommon to have instances of tight trading ranges for months at a time, especially into the fall time frame. Perhaps this year’s tighter trading range has lasted longer than in past years.
So, what will prod this market into a rally that can grow legs and catch fire?
Rusch says that since 1990, in almost every year, there is at least a 20% to 30% move from the December contract low to the following July contract high.
“The cause of that rally can be any number of things, but the important part is the rally almost always happens. This 20% to 30% rally potential needs to be planned for and strategies built now to take advantage if this,” Rusch says. Then a Plan B and C for a ‘black swan’ event can be prepared.”
Generally speaking, in order to get a move above $4.50 futures, investors would have to build in risk premium from a major shift in production or weather impact.
“I would not consider a weather impact in 2018 a black swan, as weather impacts are part of farming. Black swans need to be more geopolitical in nature. So, a dollar range ($3.50 to $4.50) in corn has potential on just a normal move off of the December futures contract’s low, coupled with some weather uncertainty at some point in 2018,” Rusch says.
A move above $4.50 per bushel probably happens with a major crop-devastating drought or geopolitical black swan event, Rusch says.
“A 50¢ to $1 potential in corn is possible without a black swan. A rally is not guaranteed but possible. And being prepared is 90% of the battle,” Rusch says.