February 2, 2010

 

CBOT Corn Review on Monday: Up in slight bounce; upside limited

 

 

Light short-covering pushed CBOT corn futures higher on Monday, although prices stayed stuck in a 5-cent range and the market's upside is seen as limited.

 

March corn ended up 2 1/2 cents, or 0.7%, to US$3.59 per bushel, and May corn ended up 2 1/2 cents to US$3.70 1/4.

 

Traders said the small bounce was both unsurprising and unimpressive, given the market's sharp drop of roughly 70 cents since mid-January. They said the market was oversold technically.

 

They added that basis is strengthening due to farmers' refusal to sell at the lower prices, which is preventing further sharp drops in futures prices.

 

But ample supplies are hanging over the market, and analysts said that the CFTC's commitments of traders report Friday showed there are still plenty of longs that most likely need to exit the market.

 

Few traders see much upside for the market, but there are differing views on whether the market is settling into a range or whether it could drop another leg lower.

 

A floor trader said he still thinks there's one more drop left that would "flush" existing longs out of the market and also scare farmers into selling.

 

Chad Henderson, analyst with Prime Ag Consultants, said he doubts the market will drop more than another dime. On the other hand, he dismisses the idea of a significant bounce. The market is in a "sell the rally" mentality, analysts say.

 

"Are the only people who are talking about a bounce the ones who want to sell it 20 cents higher?" Henderson said.

 

In addition to large U.S. supplies, favorable weather in South America has fueled expectations that crops will be big there as well.

 

Funds bought an estimated 4,000 contracts.

 

Despite the recent improvement in basis, or the difference between cash and futures prices, the prospect of warming weather in coming weeks could subject millions of bushels of stored U.S. corn to spoilage, resulting in waves of farmer selling and even lower prices.

 

Farmers won't be able to wait out higher prices because damaged corn in storage could easily spoil as temperatures rise, making it all but worthless.

 

Much of the U.S. corn crop was stored with higher-than-usual moisture levels because a wet fall didn't allow the crop to dry properly, making molds and the toxic byproducts they produce a problem.