December 2012 corn futures prices have been range bound between $7.10/bu and $7.75/bu since mid-September. Despite trading in this range for more than two months, corn prices continue to be volatile and have moved to the ends of that range several times. Most recently, December corn prices gapped lower three weeks ago following the November World Agricultural Supply and Demand Estimates. At the time, technical selling, post-harvest pressure, and expectations for the Brazilian crop to be planted on time further softened prices. However, in the last two weeks, corn futures prices have regained nearly $0.30/bu of that loss, despite the late-week sell-off last Thursday and Friday. While there wasn’t one primary driver behind that rally, several factors have contributed to the recent strength in corn prices.
First, from a technical standpoint, the market had become quite oversold. As the price began to move slightly higher, additional technical signals pointed to higher prices, which spurred additional buying. For example, stochastics moved above 20%, and %K crossed %D from below as it moved out of the oversold zone, indicating a buy opportunity. Further, the relative strength index (RSI) bottomed out and began increasing, and moving averages began increasing. Eventually, the short term moving averaged crossed the long term moving average, also a buy signal.
Second, world production concerns have gained traction in the last several days. In early November, USDA estimated Argentine corn production at 28.0 mmt. Now, many analysts in the industry expect 2012/13 corn production to be 22-23 mmt for the crop. Much of that reduction was due to very wet conditions at planting time in October and early November that slowed planting. At this point, only 50% of the Agrentine corn crop has been planted, compared to 62% at this time last year. Brazilian corn production, estimated at 70 mmt by USDA in early November could also be lowered as dry conditions continue to stress the corn crop. Analysts expect Urkaine corn production to fall from USDA’s current projection of 21 mmt to about 18 mmt. Overall, world corn production is projected to more than 40 mmt lower than last year. And, despite U.S. exports being dismal thus far this marketing year, prospects appear to be improving for U.S. shipments as U.S. prices become more competitive on the world market.
The continuing U.S. drought is a third bullish factor supporting the corn market. While many input suppliers are encouraging producers to “plan for a normal year,” the drought remains entrenched across much of the Midwest. With an historically small ending stocks-to-use ratio for the 2012-2013 marketing year, pressure is building for the 2013-2014 production to provide some cushion to supplies. With an expected acreage increase to 97-98 million acres next year and near trendline yields, ending stocks would increase substantially. However, at this point, it would be hard to expect national corn yield to be near 165 bu/acre next year given the huge moisture deficit that appears will still be present at the beginning of the growing season. Certainly, a lot can and will change between now and the beginning of the 2013 growing season, but at this point, the market (and likely many farmers) are growing increasingly concerned about next year’s yield prospects.
Another factor supportive to the corn market is the strength in the wheat and soybean markets. Recent support in the wheat market has resulted from relatively good foreign demand and a continued worsening of the U.S.’s crop condition. As of last week, only 33% of the nation’s winter wheat crop was rated good or excellent, which is a record low rating for the fall months. Of course, the drought has been the primary driver to the poor condition of the winter wheat crop, and its impact is centered around South Dakota where only 2% of the crop is rated good (none is rated excellent) and 64% is rated poor or very poor. On the soybean side, demand is leading the price increase, which as been more than $0.70/bu since the most recent low on November 16. Soybean exports have been terrific thus far this marketing year. For the first ninety days of the marketing year (beginning September 1), soybean exports have totaled 496.8 million bushels, 37% of the total forecasted for the 2012-2013 marketing year. Now soybean oil exports are surging as well. In the last two weeks, the U.S. has sold almost 40% of its forecasted annual total, so accumulated soyoil exports for the marketing year have already exceeded the annual expected total despite ten months remaining in the marketing year. Further supporting the soybean market is the possibility of the $1/gallon biodiesel blender’s credit being re-instated retroactively to the beginning of 2012, which is currently being rumored.
Despite all the factors above outlining a bullish outlook for grain and oilseed prices, there remain bearish factors as well. One of the most encompassing price threats is the condition of the economy in the U.S. and world, and the potential resolution to the looming ‘fiscal cliff.’ Commodity markets, despite being volatile themselves, do not like political and economic uncertainty and tend to reflect this risk premium through a lower price.
Managing and marketing decisions through these volatile times is a challenge. At this time, though, it doesn’t appear like sellers need to be overly aggressive about making sales. Not only is the futures market supported through national and global fundamentals, but local basis is improving in most markets as well. But, for producers desiring to take some risk off the table or needing to generate some cash flow, making another incremental sale in this rally near the top of the trading range makes sense. Even considering a small sale of 2013 production in the $5.90/bu area (cash basis eastern South Dakota) to start next year’s sales is a reasonable strategy, particularly if inputs are being purchased now. Livestock feeders and other corn buyers could have a hard time finding a great buying opportunity. As long as the potential for the U.S. drought to linger into the 2013 growing season remains, corn prices will be underpinned near the low of the current trading range. So, advancing purchases on technical sell-offs and other weaknesses in the market may be buyers’ only recourse at this time.
The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.
Source: Darrell Mark