October 26, 2009

The recipe for the recent rally in Chicago Board of Trade corn prices includes several bullish ingredients, but strong demand isn't one of them.

 

After recently topping one million tonnes through the summer, and as recently as the week ended Sept. 23, weekly net export sales have since lagged. The US Department of Agriculture on Thursday reported net sales of 249,500 tonnes for the week ended Oct. 15

 

"The real negative point of this is that nearly all corn sold was to fill out soymeal cargos," said MaxYield commodity trade adviser Karl Setzer. "Nobody really wanted our corn, but took it anyway."

 

Traders and analysts differ on the significance of the weak sales, whether they have been caused by higher prices and to what extent the poor sales would weigh on the market.

 

The market surged to five-month highs this week, and on Thursday the nearby contracts closed above US$4 for the first time since June. For some, the weak export sales barely merit consideration as the market rallies on a weaker dollar, fund-buying and perpetually lousy harvest weather forecasts.

 

"We're here for reasons other than demand," a floor trader said.

 

But others say the weak sales are a sign that importers are going to pass on prices at this level and can't be ignored. Jason Britt, president of Central State Commodities, said this week's sales total was "horrible" and could give some traders pause.

 

"You have to say 'wait a second, we still have to sell $4 corn,'" Britt said.

 

The weak sales indicate end-users are unwilling to chase prices sharply higher given current fundamental factors, said Shawn McCambridge, senior grains analyst with Prudential Bache. A floor trader said it "seems like there's more demand for futures than there is demand for the physical commodity."

 

Longer-term, demand is the bigger unknown for the market, said Joel Karlin, analyst for Western Milling. He and others say that regardless of the adverse harvest weather, this year's crop will end up somewhere around 13 billion bushels. But it's unclear if there will be 13 billion bushels of demand, Karlin said, particularly given the "USDA's tendency to overstate demand."

 

"Supply is known," Karlin said. "Demand is a little questionable at this point."

 

The recently weak export sales aren't wholly caused by higher prices, some analysts said. Terry Reilly, analyst for Citigroup, said that exports are being limited because of the lack of availability of corn at the Gulf or other ports. The slow harvest has meant little corn in the pipeline.

 

As the harvest picks up and more corn becomes available, end-users will start to buy more, and prices will drop, some analysts said. McCambridge said until the harvest picks up, it is too soon to worry.

 

"If it continues into the middle of November and we don't see a rebound in those numbers to a million-plus on a weekly basis, then yes, it becomes a greater concern," McCambridge said.

 

Although the dollar is often seen as a key to demand for US exports, at least a couple of analysts say that isn't the case for corn.

 

Allendale Vice President for Marketing Joe Victor said in a recent report that the conventional wisdom that a weaker dollar boosts US export demand, and vice versa, doesn't appear to be true.

 

In the past 29 years, this assumption proved false 14 times, he said.

 

Among corn, soy, wheat, cattle and hogs, the strongest correlation between the dollar and exports is with beef, although the correlation isn't all that strong there, Victor said.

 

Reilly said foreign countries always consume more corn than they can produce, and that the US makes up the difference. That's what drives exports, he said.

 

"Long-term, it doesn't matter, the dollar," Reilly said. "In the short term it does. It may generate some snap tenders, but overall we don't see it as a major macro driver on our exports."

 

Still, Victor added: "If the flow of money wants to perceive a lower dollar will ultimately create strong demand for corn exports, then there stands little reason to stand in front of the 100-car unit freight train."