Buy or sell: Corn supply fears & demand fire support, but soy influence key

Just over one month into 2018 and corn’s price outlook has improved dramatically, gaining nearly 6% in little over four weeks.

In that movement, prices have been aided and abetted by US dollar fluctuations and rampant supportive strength across the agriculture commodity stable, with supercharged performances from first wheat and then soybeans.

The gains, and losses, on corn have been less pronounced, indicating that the complex continues to enjoy its own dynamics that are insulating it to some extent from the full effect of price direction.

That has enabled it to benefit from both wheat’s strength in late January and soybean’s strength in early February, consolidating its position at price levels that haven’t been seen for some six months.

In the following, Agricensus summarises three fundamental bullish and bearish factors for global corn markets.

Buy

Corn’s position as the cheapest animal feed option has been noted for some time – a shortage of feed wheat and barley through the latter stages of 2017 saw prices of feed wheat rising to reach near parity with milling wheat prices, some $20/mt or so above typical corn prices in the Black Sea.

Since then, the early part of 2018 has seen corn, particularly in the US, consolidate its position as cheapest feed grain, with additional expectations coming after China announced it would have to add 300,000 mt to its corn import expectations.

While feed demand has picked up, the second supportive factor has been on the supply side where weather fears have seen pressure mounting on crop estimates for key South American producers.

In early February, the USDA bowed to mounting pressure by cutting its Argentina corn production estimate from 42 million mt to 39 million mt, bringing it closer in line with other estimates, but left the 95 million mt estimate for Brazil’s crop untouched.

With the dryness in Argentina and southern Brazil continuing to dog both planting and development, the USDA’s Brazil number looks off the pace of other estimates, with some calling for as low as 86 million mt, and further downward revisions cannot be ruled out.

Finally, China and its ongoing efforts to tackle its excess corn stocks is having an impact domestically, with prices firm enough to bolster import expectations, a factor that the developing potential trade spat with the US has played into.

Officials recently announced an investigation into US sorghum subsidies and promptly followed that up with an upwardly revised corn import expectation in its February CASDE report – adding 300,000 mt to take total corn imports to 1.5 million mt.

According to an analyst at JCI China, domestic corn prices have picked up on the back of “more digestion of corn stocks than expected,” presenting a logistics problem in parts of the country.

The government has been encouraging downstream processing of corn through increased subsidies, which has helped support high consumption in the south of the country where corn cannot be easily transported through the rail transportation links.

Sell

But corn hasn’t been fully in control of its own destiny, as surging wheat and soybean prices have trailblazed direction while a collapse in the US dollar on international currency markets did much to bolster the competitiveness of US corn versus other origins.

Wheat prices surged in the wake of USDA data on the poorer-than-anticipated state of the US hard red winter crop, followed by soybean dramatically retaking territory above the $10/bu level on ongoing fears around South American weather.

Secondly, reports that Brazil may see wholesale switching away of its safrinha crop from corn towards cotton appear to have been limited, with sources seeing seed and fertilizer buying in line with typical corn planting patterns.

The delay to the soybean harvest in Brazil has also pushed past the typical cotton planting period, meaning that corn is likely to be preferred.

“Farmers are going to plant their corn, but they are going to plant less – maybe 4% to 5% less in acreage,” Daniela Sequeira of Brazilian crop consultancy AgRural said.

“But they are going to plant a low cost crop – less fertiliser, less chemicals and praying for good weather,” she added.

While that means the safrinha corn crop may carry a weather-risk, it may yet surprise those who have written down its size.

Finally, managed money’s net short position on CME corn contracts has been drastically reduced, minimising the rush to cover that could have come in the event of any sudden shock.

Through the final quarter of 2017, the net short position on both futures and options averaged 191,060 lots as short positions comprehensively overwhelmed those in the long camp.

By January 16, short positions had swollen to 438,172 lots, taking the net short to 226,876.

As of February 6, that length has evaporated, falling to 82,924 lots - less than the net short SRW wheat position at 83,394 - as the short position shed 24%, or 105,100 lots.

“It’s a game of ownership transfer… you’d look to the CFTC and expect people to cover shorts... we’ve just taken a big bullish element out of the equation,” one Switzerland-based corn trader told Agricensus.