July 20, 2009

 

The favourable weather across the US corn belt has some analysts saying that Chicago Board of Trade corn futures could test the psychologically important $3 mark sooner rather than later.

 

A slide to US$3 would represent a 33 percent drop since the front month scraped US$4.50 on June 10. Just a couple weeks ago, market bears were saying corn could test US$3 by harvest, if the weather holds up.

 

With the market setting new contract lows on Thursday, that timetable has since moved up. And some analysts say the market may not stop at US$3.

 

"We could definitely get there sooner rather than later," said Joel Karlin, an analyst for Western Milling. "I'm wondering where this thing could go, because we often overshoot our target, too."

 

Prices had already dropped by 65 cents in June when the US Department of Agriculture stunned the market and projected farmers would plant 87 million acres of corn this season, the second-highest total ever. Since then, prices for front-month corn have dropped another 68 cents to a Thursday close of US$3.16 3/4 in the September contract. A year ago prices were above US$6.

 

In addition to the large planted acreage number, the market is now expecting strong yields that could make for a huge crop. Rainfall coverage has been ample, with only a few scattered dry spots in the Corn Belt, and temperatures have been moderate to cool.

 

Some analysts say there is a strong correlation between a cool summer and strong yields, and traders say the market is filled with talk about a potential record yield. The current record is 160.4 bushels per acre, set in 2004.

 

Citigroup analyst Terry Reilly said that September futures could trade below US$3 by the middle of August if the weather outlook remains favourable.

 

"Basis new crop, I look for December to trade near US$3.00 sometime before September 15th, which would ultimately be about a month to two months before previous expectations," Reilly said.

 

Reilly had said after the USDA acreage report was released that December corn could break US$3 by harvest.

 

As of now, weather forecasts remain favourable for the rest of July, and a couple analysts noted Friday that weather looks good even beyond that.

 

"Don't overlook updated (National Weather Service) 30 & 90 day forecasts which are largely benign," MF Global vice president of research Rich Feltes said in a commentary Friday.

 

Speculative funds have liquidated their long positions in recent weeks. A floor trader said the key question now is whether those funds will opt to go net short.

 

Karlin noted that seasonal trends point lower from now until the USDA's crop production report Aug. 12.

 

Jim Riley, an analyst for Linn Group, said in a commentary Friday that the market's desire to talk about US$3 corn "could become a self-fulfilling prophecy."

 

But some traders and analysts say that after the recent plunge in prices, there is virtually no risk premium left in the market and that the market will be reluctant to push much further.

 

"I think you're going to see a rally, whether it's technical in nature, or something changes fundamentally in here," said Tom Leffler, owner of Leffler Commodities.

 

He sees the market making a run to US$3.50 in the December contract and possibly toward US$3.75.

 

Leffler said there remains the potential for a late heat wave to hurt yields, and added that "all the moisture and all the cool temperatures are great, but you also need heat units."

 

Other traders said the cool weather, while much better than a heat wave, is not necessarily ideal. The chilly weather also makes it easier to envision an early first freeze, which would be especially hurtful to the crop because it was planted late in many areas, traders said.

 

Chad Henderson, an analyst for Prime Ag Consultants who has been mostly bearish on corn in recent months, said he is "moving to the point where I'm wondering if we're low enough."

 

If the market hits US$3, it will likely take several weeks, he said.

 

"I think the easy dollar's been made," Henderson said. "I think it's another tough 30 cents."