Market Perspectives October 4, 2013

Outlook: USDA’s quarterly Grain Stocks report was released Monday September 30 and the data was considered bearish for corn because the September 1 snapshot of corn stocks at 824 million bushels was larger than the average estimate of 688 million bushels. As well, the stocks estimate for soybeans was greater than market expectations and was also considered bearish. It was noted in last week’s commentary that if these two events happened then the December corn contract would make a new low, and this scenario did occur. It was also noted in last week’s commentary that such a new low would present an opportunity for end-users of corn to lock-in increasingly profitable margins, and additional buying has occurred as the December contract traded around $4.40 per bushel. As a result, the December 2013 corn contract has remained in a narrow trading range this week as buying and selling forces seem evenly matched.

Experienced end-users of corn have interest in extending their coverage because they recognize that prices of the nearby contract that are below $4.40 per bushel are not too far above the cost of production. Thus, acquiring at present price levels, and paying for the cost of storage in more distant contracts, is more than a fair compromise for the opportunity to have coverage though the uncertainty of next spring and summer. Those end-users also seem to recognize that this opportunity is not indefinite.

Speculators with short positions in corn were emboldened by the data in Monday’s Stocks report and they are hoping for some sort of corn yield increase in next Friday’s WASDE report. The price weakness in soybeans also did nothing to counteract the assumption by some of these traders that the bull market in row-crops had run its course. However, much of this week’s selling in soybeans simply occurred because the nearby contract expires in November and when no bullish news was presented within Monday’s stocks report, then those speculators were forced to reduce their sizable long position in soybeans. Well, those same speculators have a similar large short position in corn, whose nearby contract expires a month later. Commercial traders are well aware of this fact, and that is the reason that many are presently securing their needs before something like an adverse weekend snow storm and/or an insufficiently bearish WASDE report causes speculators to uniformly reduce their substantial short position in the December 2013 corn contract.