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COMMENTARY & ANALYSIS

May 27, 2019
 
Bullish corn, a Latin bumper crop and short funds? Behold the state of world corn markets
 
Even though corn staged an impressive rally, funds are still holding net short positions in the golden grain. They will continue doing so until the market digests a bountiful Latin American crop just coming to market.
 
Short-term corn weakness, soybean firmness. Expect corn to finish 2019 strongly as beans, wheat weaken.
 
By Eric J. Brooks
 
An eFeedLink Hot Topic
 
 
I ended my last grain market article with "If you're a high risk/high reward speculator, the above forecast implies a combination of call options on corn near US$3.50/bushel and put options on soybeans slightly over US$8.00/bushel."

Within ten days of that article, corn closed the week at US$4.04/bushel and soybeans at US$8.30/bushel, thereby monetizing the grain options recommendation but not the oilseed –at least not yet. At this point, we can provide you with both certainties and uncertainties, all based on weather, planting intentions, government policies and volatile trade politics.
 
Interestingly, despite the sharp recent increase in corn prices, funds still are in a net short position –and have good reasons to stay that way, at least for a few more weeks.
 
An unusually cold, wet spring has repeatedly inundated US Midwestern corn and soybean growing states including Nebraska, Minnesota, the Dakotas, Illinois, Indiana and Ohio with heavy rain, snow and unseasonably cold temperatures. That has left countless US farm fields too flooded and cold to plant any crops whatsoever.
 
It is now the officially slowest corn planting season on record since the USDA first monitoring the crop planting several decades ago. By the time you read this article (May 27), 50% to 55% of America's 2019 corn crop will have been planted, compared to an average of over 85% to 90% by this time of year.

Corn's far lower non-China stocks to use ratio (14% for corn vs 32% for beans) and longer growing season means that this inclement weather inflated its cost far more than that of beans. The last three weeks of weather woes have boosted corn's price upwards by approximately 15% but beans by only 3%.
 
Moreover, this trend probably has further to run: Meteorologists are predicting wet US Midwestern weather to persist through May into early June. On May 24 Reuters quoted Summit Commodity Brokerage analyst Tomm Pfitzenmaier stating "There are forecasts for the central Midwestern corn belt getting rain for the next two weeks." –Given that June 6 is the last day corn can be planted in many US grain growing areas, this forecast has very bullish short-term implications.
 
On one hand, Pfitzenmaier added "They're not just worried about getting corn planted. They're definitely worried about soybeans not getting planted as well." But even this prospect is less bullish for soy as it is corn.
 
First, when feed crops stock-to-use ratios are adjusted for China's import-restricted walled off corn market, there are almost 130% more soybeans in the world than there is corn.  Second, the current hostile state of US-China trade negotiations puts a far higher risk premium on planting US soybeans than it does on planting corn.
 
Third, to receive financial compensation from the Trump administration's farm aid package, farmers impacted by China's 25% soybean tariff are required by law to plant any crop of their choice.
 
–This means that in many cases, even though the corn planting window has closed, farms will opt to plant a money-losing soybean crop just to receive government aid. In other cases, US farmers are keeping their eye on wheat prices, which have also been boosted by bad weather. In such instances, they may opt to plant wheat (which has a shorter growing season) in place of corn. That would give more support to Q3 and Q4 corn prices while undermining wheat's H2 2019 performance.
 
--Even so,  while we see a strong corn performance during the US harvest and beyond, there is also a GOOD REASON why even after this 15% CBOT rally, funds continue to keep short positions in corn: There is a large 35 million tonne increase over last year's combined Argentinian and Brazilian corn crop harvest. If the latter's sahfrinha (second season harvest) goes well, it may rise to 40 million tonnes.
 
The bountiful Latin American harvest will arrive on the world market in Q2 and the first half of Q3, while the US corn crop is still growing. We can expect those South American supplies to keep corn within the US$3.80-US$4.30/bushel range unless bad US growing weather persists into late Q2 or early Q3, prematurely raising the specter of supply shortfalls.
 
Do Note for beans: All this will also coincide with Latin America's soybean harvest coming to market. Along with the substitution of soybeans in place of corn growing acres, the coming of Brazilian and Argentinian bean harvests to market will probably trigger a mid-year movement of soybeans below US$8.00/bushel: At this point, the world is grossly oversupplied with beans and the market needs to give South American growers a strong message to plant less of them: A price near soybean's break-even profit/loss point below US$8.00/bushel is required.
 
Thereafter, whether corn trades near US$4.00/bushel or rises above US$5.00/bushel very much depends on how much America's corn crop comes up short.
 
Whether they substitute wheat in place of corn or not, the weather-shortened growing season implies that even if US corn planted acreage comes in close to average levels, crop yields will be below average. This will be even more the case if a lot of acreage gets transferred from corn to soybeans wheat or other crops.
 
Hence, there is no doubt that America's corn harvest will come up short relative to the large 389 million tonne harvest the USDA initially forecasted. The question is, will it be one of 330 to 350 million tonnes? 300 to 330 million tonnes? Or in the 267 to 300 million tonne range? Much depends on early summer weather that follows this rainy spell and how US crop planting intentions play out in this much delayed growing season.
 
Do Note for corn: That means that the 35-million tonne "upward bump" of an above-average South American crop hitting the market in Q2 will be followed by a US crop that comes somewhere between 40 and 100 million tonnes+ below expectations: For corn, a small bear may be soon be followed by a larger sized bull.
 
Hence the reason why funds are staying short on corn (for now): Expect the funds to liquidate their short corn positions when the large Latin harvest deflates prices over the next six weeks. Thereafter, they will build a long position to take advantage of upcoming corn market tightness, the golden grain's upward potential inversely proportional to the US crop's size, which is destined to come in below expectations.
 
For soybeans, a put option near US$8.00/bushel may pay out over the next two months. Call options or late year corn futures near US$4.00/bushel can also be recommended, the exact price level and option duration dependent on your investment time window. The full scope of corn's upside potential, however, will only be known in early Q3 when planting is complete and the pollination season weather window opens.
 


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