After many months of a bearish outlook for corn, the market seems more supported. Though fundamentals are still weighing on futures; there are many reasons why obtaining extended futures coverage might be a wise decision.
Last week’s WASDE report was somewhat bullish, with USDA increasing exports by 125 million bushels. While that move might have caught some by surprise, corn exports could have the potential to remain strong in the near future. The dollar has recently depreciated, making American goods more attractive compared to other origins. Furthermore, Brazil’s government agricultural agency CONAB recently decreased its projection of total production to 88 million metric tons. (MMT). This projection is considerably lower than the 95 MMT forecast by USDA and almost 10.5 MMT lower than the year prior. According to CONAB, heavy rains in Brazil have delayed soybean harvest, increasing the risk that the second corn crop will be subjected to colder and drier weather.
Watching La Niña
While demand increases should be monitored, the greatest threat to the crop now is weather. The current weather pattern is increasingly resembling La Niña from 2012. Argentina’s drought is very similar to that year. Recent rains are 50 percent below the three year average, and while a smaller crop in Argentina will give some support in the future, it does not compare to the potential impact of drought conditions extending to the U.S. During 2012, corn futures reached $8.50 per bushel and soybean futures $17.95 per bushel. La Niña was a concern during other years when crops ended up developing without a problem, but the drought in Argentina is worse than in recent years.
Even if weather turns out to be ideal, the downside for this market seems limited. This became evident after two consecutive extremely bearish WASDE reports without a reaction in the futures market. USDA increased yield to its highest level ever, surpassing analyst expectations by far, and the futures market only dropped a couple of cents each time. No reaction from such bearish news made it clear that there is little downside potential.
Funds are still holding a short position that might turn long at any sign of threat. On the other hand, farmers might sell any rally to hedge their crop, somewhat muting the upside potential.
Ethanol Demand & Trade Barriers
Ethanol is another category that will keep the market supported. Production has been at a record for months now, and with positive margins, strong production is expected to continue. In August 2017, Brazil imposed a 20 percent tariff on imports of U.S. ethanol above a quota of 600 million liters, though Brazilian authorities have hinted that the tariff might be lifted if the U.S. removes its June 2017 ban on Brazilian beef. A big wildcard in this category is China. The Chinese government announced a new policy, in which all gasoline must contain 10 percent ethanol by 2020. This leaves a big question: Where is all that corn or feedstock going to come from? The first impression is that China will use government stocks for the production of the fuel. After all, out of the 203 MMT of world ending stocks, China is holding 80 MMT or 40 percent. However, with production almost matching consumption, and approximately 250 million cars, corn imports have the potential to increase in the near future.
The Chinese government also recently announced an antidumping investigation on U.S. sorghum-seen as a response to new U.S. tariffs on solar panels and washing machines. This will greatly impact that market as China is the number-one importer of U.S. sorghum. Out of the 5 MMT imported during 2017, 4.76 MMT came from the U.S. While this news is bearish sorghum, it is also bullish corn as some of that demand will spill over to this market.
Soy Complex Sway
Soybeans is another great influence on corn movements. Despite soybeans being the arguably more bullish market in recent months, it might start taking a backseat to corn. U.S. exports are very slow, as Brazil keeps claiming export demand from the U.S. Buying corn from Brazil as opposed to the U.S. almost seems like a no brainer. Brazilian soybeans are better quality and until recently were trading at a discount to U.S. soybeans.
Despite farmers in Brazil using the same GM seeds, longer and warmer days in South America leads to more protein. Soybean farmers in general have traded protein for yield in recent years. As yield increases, protein content gets diluted. Farmers do not seem concerned, as the increase in profit that comes from higher yield more than makes up for the discount they have to offer for less protein. Furthermore, U.S. soybeans have more foreign matter, encouraging China to lower the foreign-matter restriction for the U.S. from 2 to 1 percent. Many weeds are becoming more resistant to the herbicide Round-up Ready, increasing the percentage of foreign material. Brazil’s investment in ports has also turned to be an advantage: Logistics have improved drastically as in recent years long waits for vessels were a deterrent to import grains from that country.
In conclusion, while corn fundamentals remain bearish and futures might not take off tomorrow, staying uncovered to gain ±20 cents might not be worth the potential upside risk. Elevated stocks and bearish fundamentals are already priced in current prices, and if the recent sharp increases in yield did not move the market, it is hard to imagine what will. Though we are off recent lows, and it’s tempting to wait for a fallback, it is important to remember that during periods of high volatility, markets can move ±20 cents in a matter of minutes.
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