Market Perspectives October 11, 2013

Outlook: USDA’s Crop Production and WASDE reports were not published today due to the government shutdown. The lack of data from USDA and the substantial short positions in corn futures by large speculators are creating a buying opportunity for global feed-grain buyers. Normally, USDA immediately announces any large grain sale to the public, but the present lack of USDA data means that global buyers can make large purchases without attracting much attention. Domestic end-users of feed grains are also extending their coverage in the present market. This pool of buying is being conveniently offset by sizable fund selling.

Speculative fund managers are confidently selling corn futures because they recognize that the United States could produce a record corn crop. Their expectation seems to be that burdensome corn stocks will force corn futures to eventually plateau at lower levels in order to buy back global market share and to encourage increased consumption. Market talk of favorable yields and potentially reduced ethanol production is causing them to sell without concern about price levels. However, people in the grain industry recognize that once grain is sold it applies little weight on the spot market. Both domestic and international buyers are seeking ownership at current price levels and will gladly utilize storage capacity. Additionally, U.S. farmers are financially secure and are placing a large amount of corn in storage because of the present pricing structure of futures contracts that encourages marketing of soybeans first and corn later in the season.

USDA’s most recent WASDE report had already presented conservative demand estimates. The estimated corn export level of 1.225 billion bushels for the 2013/14 season was not made in anticipation of an enormous rebound in exports. Note that before the droughts of the two prior seasons, U.S. corn exports for the previous five years averaged over 2 billion bushels. Similarly, USDA’s most recent forecast for domestic consumption is realistic and has been surpassed in prior seasons. Recall that corn exports were strong before USDA stopped reporting, and the present U.S. corn basis is still above the historical norm and is not indicative of a burdensome harvest that is priced too high.

Market participants recognize that U.S. corn acreage is not going to remain at present levels next season and indications are that South American corn planting could also decline below expectations due to recent dry soils, economic conditions and the ratio between soybean and corn prices. Both experienced farmers and feed grain buyers recognize that speculators who are presently selling corn contracts will eventually reach a point where they desire to buy back their positions after they have shoved down prices – and it could well be at a level where no one else has interest in assuming the short side. So in the interim, end-users will continue to take advantage of the present low futures prices and the majority of corn producers seem to recognize that while corn prices have fallen, the sky has not.