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Wednesday, May 09, 2012

How Can Corn Prices Move In Three Directions At Once?


Wily three-headed monsters lived in caves of Greek and Roman mythology, but the three personalities of the corn market live in the trading pits at the CME, and have been about as challenging to conquer.  New crop futures, old crop futures, and the basis for cash corn each have a mind of their own, and while you are addressing one head-on, another may come around to bite you in the tailgate.

The corn market has expressed its opposition to the concept of carrying charges.  Those simple elements of storage and interest have been tossed out with May corn closing at $6.66 Tuesday, while July closed at $6.23, September at $5.38, and December at $5.28.  Kansas State marketing specialist Dan O’Brien says the market has become inverted, indicating that the “market anticipates a marked drop in corn futures once early harvest supplies become available from the Southern US in late summer and that corn futures will drop even further once the bulk of the US harvest begins in earnest farther north in the US Cornbelt.” Although the May contract is in delivery status, the July contract is 85¢ above September and 95¢ above the December contract.

December futures exceeded $6.70 last August, and have faded to as low as $5.15.  That is a function of large crop expectations, early planting, good planting weather, and the potential for a yield above the trend, says University of Illinois marketing specialist Darrell Good. While supply points to lack of concern, there are concerns about demand, one of which is a stagnating demand curve for ethanol, and the other is the growing European debt crisis.  With a slowing of demand and a growing of supply, Good says there could be a substantial build up of corn inventory and a return to the lower prices close to $4.

On the other hand are the futures prices for the remaining months in the old crop marketing year.  They have experienced a $2 swing from last August to April, with a slight recovery to date.  July futures have shown some weakness because of the prospect for new corn being early enough to supply market demand.  Export demand for the old crop has been good, but whether they can reach the USDA target remains questionable, according to Good.  With ethanol refineries slowing due to availability and reduced demand for gasoline, the target for ethanol refining may fall short; along with meeting the target for livestock feed demand.  Darrell Good says, “In general, the old crop price premium provides an incentive for users to delay consumption as much as possible until new crop supplies are available.”   

But immediate needs of the cash market are yet another personality.  Your elevator may have offered substantial incentives to draw corn out of your storage because of spot shortages that are developing.  Feedlots and ethanol refineries need a steady supply of corn, and even the export market has been paying $1 over July futures to get corn at the Gulf of Mexico.  That is for corn delivered immediately.  O’Brien said the basis at the livestock feeding center at Garden City, KS has been historically high, ranging up to 20¢ above nearby futures contracts.  He says that is as much as 85¢ higher than it has been at times in the past several years.

Good says declining futures prices for deferred contracts indicates expectations for plentiful supplies, but he says the current strong basis—particularly for some deferred contracts—raises questions.  The basis can be strong, but not for an extended period of time as is the current scenario.  He questions if that indicates slow sales by producers, higher rates of usage than revealed, or the market’s expectations for tight stocks at the end of the marketing year.

The current corn market is showing very tight stocks now—moderately tight stocks in the intermediate future—and plentiful stocks in the distant future.  Since the basis is strong, indicating very short stocks in some regions, but because of the inversion of the market for many months to come, questions are raised about just how short those stocks might be.

Posted by Stu Ellis on 05/09 at 01:03 AM | Permalink

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