Chicago Board of Trade Market News
Outlook: USDA will update feed grain production estimates next Wednesday, August 12, and there seems to be a uniform expectation among market participants that yield and production estimates for U.S. corn will decline by one degree or another. Bearish analysts call for additional price weakness if the average U.S. corn yield only has a limited reduction, but World Perspectives pointed out that U.S. corn ending stocks for 2015/16 are currently estimated to be 1.6 billion bushels with no reduction in yield, and the December 2015 contract is currently trading near the low of last season. They elaborate that increasing U.S. ending stocks by 250 million bushels, to 1.850 billion bushels, would raise the stocks-to-use ratio to 13.5 percent. This is similar to the present 13 percent that the 2014/15 season eventually drifted down to and would not imply that corn contracts should go lower. Alternatively, reducing USDA’s current estimate of 1.6 billion bushel ending stocks for 2015/16 by 250 million bushels would cause the stocks-to-use ratio to decline down to 10 percent. At this level the price of corn contracts starts to increase exponentially.
The yield estimates will become increasingly accurate as the August reports are followed by updates in September, October and November. Market participants recognize that there is a tendency for declining yields to continue declining. Of course, bearish traders can tout the fact that China is poised to reduce the price on their sizable domestic corn stocks this fall. That action could limit near-term U.S. exports of corn and DDGS to China, but please recall that China was not a buyer of U.S. corn for a part of last season and the U.S. corn futures prices did not fall much below recent lows back in 2014/15, when ending stocks were presumed to be closer to 2 billion bushels.
Truly forcing large funds to temporarily drive corn contracts lower by throwing in the towel on their large pool of unprofitable long positions may also require an increase in feed grain yield estimates and a decrease in demand estimates for 2015/16. Otherwise, end users will increase long hedges if limited downside is perceived. If it appears that corn contracts have formed a bottom and may work higher, then Individuals holding sizable short positions can become nervous as increasing prices approach their entry point. As well, export sales tend to pick up when it appears that prices have reached a bottom and are starting to rebound.