Buy or sell: Rock bottom corn hinges on fresh sources of demand

Conventional wisdom has it that when you reach rock bottom, the only way from there is up.

It’s a sentiment that many in the corn market may sympathise with as directionally, for much of 2017, corn prices only moved one way – downwards.

Nearby corn futures have slumped 20% from a 2017 high of $4.2325/bu on July 11 to $3.47/bu, as the reality of a world awash with corn took hold.

Yet while there are reasons for cautious optimism, not least the weather in South America, fundamentally the market remains well supplied, with stock levels likely to be revised upwards in the upcoming January WASDE.

The following summarises three fundamental bearish and bullish factors for global corn markets.

Buy

The world may be awash with corn, but factors such as cold weather and insufficient railcars have created bottlenecks in major supply nations such as Ukraine and the US, making it harder to get the corn to key ports.

Ukraine’s deputy agriculture minister blamed rail bottlenecks for contributing to an annual 6% fall in grain exports to 41 million mt late in December. In the US extreme cold has shut down or dramatically slowed transit along key river arteries.

For the week ending December 23, just ahead of the plunge in temperatures, barge movements were already down week-on-week according to the USDA, with 396 barges moving down river – a fall of 23% versus the week ending December 16.

A second supportive factor has been the performance of US energy demand, which has maintained an outlet for US corn when export performance has been weak, even with high stock levels and a slowdown in driving demand as winter settles in.

Despite rising energy prices, US ethanol production levels have consistently held at near-record levels of over 1 million barrels a day, providing an outlet for some 5.5 billion bushels of corn through 2017, and prompting expectations that the USDA will revisit its forecast after it added 50 million bushels to the estimate in the December update.

Finally, a third factor is the relatively low price has fired demand from the feed sector – with the US and Asia both seeing an uptick in animal feed interest for corn in response to cold weather and uncompetitive alternatives.

However, with the Commitment of Traders still showing a substantial net short position – 206,624 lots, nearly double those holding long positions – the market may yet need some convincing on 2018's better days. 

Sell

On the flip side, it’s hard to hide the fact there’s a lot of corn in the world and competition to place it is fierce.

Among the upcoming WASDE expectations, many are braced for a revisiting of the global corn stock situation, which December’s WASDE put at 204.08 million mt for 2017/2018, with China’s ending stocks contributing 79.56 million mt.

Seasoned China watchers put stocks there alone at a level north of 200 million mt and the market can expect huge revisions to international agencies’ stock estimates this year.

A second concern, and an unknown unknown, is the intentions of the White House in renegotiating two key planks supporting the US corn industry – NAFTA and the Renewable Fuel Standard, the cornerstone legislation that underpins ethanol and biofuel consumption.

Mexico remains the biggest customer for US corn, with outstanding sales for the current marketing year at 5.34 million mt as of December 21 – already some 800,000 mt behind the same point of the previous marketing year.

Alongside that, the biofuel sector was shaken when President Trump’s administration invited two key pro-RFS political figures – Iowan Senators Chuck Grassley and Joni Ernst – to meet with their oil counterparts to discuss revising the RFS.

And while NAFTA doesn’t change the net balance of global corn, it still could depress Board prices.

Finally, China.

Arguably China could have a foot in both the buy and the sell camp, but its recent introduction of more stringent quality controls on US soybeans (and the willingness of the US to comply by slapping labels on exports that fall short) coupled with its capacity to play the GMO card make it a trade partner with baggage.

While the country seems intent on cutting its corn stockpiles through limiting acreage and bolstering its ethanol credentials, it drives a bargain and there are no shortage of sellers.