AM markets: has the rally in corn futures got legs?

corn

Has the rally in corn futures got legs?

futures for December have bounced more than 5% since official data on Friday showed US inventories of the grain, as of the start of last month, smaller than investors had expected.

Has the rally in corn futures got legs? 

(The figure was taken as an indication of stronger-than-expected domestic demand for livestock feed, given that usage for other major purposes, such as exports and ethanol production, can be gauged by separate briefings.)

But there are reasons to think that the rally could have further to go, some based on chart patterns, after the contract escaped, upwards, out of a trading range that it had trodden since mid-July.

"Corn inching above resistance at $3.44 ¼ a bushel on Monday and closing above that level helped bulls at least psychologically," said Tregg Cronin at Halo Commodity Company. 

"The close helped keep in place the inverted head and shoulders pattern formation," a bullish chart signal, "which could eventually produce a run to the $3.75-3.80 a bushel area".

That implies prices have another 8% to rise.

Comparison to 2009

Another upbeat analysis comes from historical comparisons, with Paragon Economics and Steiner Consulting in a report comparing this year with 2009, another year which produced a record US crop (as this one is expected to be).

"During 2009, nearby corn futures prices averaged $4.12 a bushel in June and proceeded to fall to $3.22 in September," the report said.

"This year, nearby corn futures averaged $4.10 in June and averaged $3.29 in September."

If the close pricing similarity holds, then there are indeed gains ahead, with 2009 seeing a rise in prices to "$3.95 a bushel in December, with the majority of the gain coming by way of a $0.50-a-bushel gain in October".

And a $0.50-a-bushel gain in October 2016 "is looking more possible than it was a week ago" too, given the bullishly-received US stocks number on Friday.

'Sharp, short-term price rally'

At Commonwealth Bank of Australia, Tobin Gorey flagged the potential for the rally to get extra vim if hedge funds are tempted to close some of their, large, net short position in the grain.

"Corn's speculative short position is very large, so investors buying back even some those positions creates the potential for a sharp, short-term price rally," Mr Gorey said.

That said, a recovery in prices at this time of year would be unusual, given the likelihood of a strong harvest (if not quite as strong as originally hoped), which would imply pressure on futures.

"We still believe that prices will return to lower levels as US harvest pressure builds," Mr Gorey said.

'Everything should clear up'

And such a rise in pressure is only made more likely by an improvement in the weather, after a somewhat damp and delayed start to the harvest.

"By the weekend, everything should clear up with above-normal temperatures forecasted for the following week," Benson Quinn Commodities said.

"Above-normal temperatures will continue… favourable conditions for drying corn down to a manageable moisture levels."

Not that the harvest has actually been delayed as much might be implied by the US Department of Agriculture number on Monday, which showed 24% of the US crop in the barn, 3 points behind the average pace.

In fact, "if we take a look at the last 25 years of harvest progress, this year is tied for eighth fastest," said Joe Lardy at CHS Hedging.

The five-year average figure "is skewed by the superfast 58% completed pace seen in 2012".

Data later

Whatever, investors were a touch undecided in early deals over price prospects, sending December corn futures lower, but not by much, with the contract down 0.1% at $3.47 ¾ a bushel as of 08:30 UK time (09:30 Chicago time).

Whether bulls or bears win out may depend on data later, with Informa Economics set to release updated yield estimates, amid the early stages of the run-down to the next US Department of Agriculture Wasde crop supply and demand report, due on Wednesday.

The USDA will later on Wednesday reveal weekly US ethanol production data, giving some idea of consumption for corn on that score.

Investors will also be looking for more export sales, after the USDA on Tuesday unveiled a sale of 100,000 tonnes of US supplies to an unknown bidder.

Such demand, "coupled with a slightly delayed harvest, is keeping a bid under the corn market," CHS Hedging's Joe Lardy said.

'Strong yield talk'

Export demand is proving particularly important for the soybean market, given growing expectations for this year's US harvest yield.

In fact, Benson Quinn  Commodities said that "yield reports we have been hearing from Minnesota, North Dakota and South Dakota are mostly well above last year and above many prior records, and support a large jump" in USDA estimates in Wednesday's Wasde report.

But demand this week is being undermined by a holiday in China, the top importer of the oilseed.

Still, Chicago soybean futures for November nudged 0.25 cents higher to $9.63 ¾ a bushel, helped by a further recovery in prices of soymeal, which gained 0.4% to $307.60 a short ton.

Soymeal is gaining support from USDA data earlier this week showing a sharp drop in US soymeal stocks in August, with many investors spreading the soybean processing products, putting in long soymeal-short soyoil bets.

Indeed, soyoil for December was 0.6% lower at 32.90 cents a pound, also feeling pressure from a 0.5% drop to 2,587 ringgit a tonne in futures in rival vegetable oil palm oil in Kuala Lumpur.

Growing spread

Meanwhile, back in Chicago, soft red winter wheat futures for December were flat at $3.95 ½ a bushel – again underperforming December futures in Minneapolis-traded spring wheat, which gained 0.5% to $5.24 ¾ a bushel.

That sent the spread to a fresh contract high just short of $1.30 a bushel, up some $1 a bushel in four months.

Prices of spring wheat, which is of far higher protein than winter, are being supported by growing worries over the quality of this year's huge world harvest, and most recently by rain delays in Canada (a huge grower of spring wheat) besides a USDA downgrade on Friday to its estimate for the domestic spring wheat crop.

'Sub-par quality'

Minneapolis-based broker Benson Quinn Commodities said that "there is also a case to be made for a much-higher-than-normal percentage of Canadian spring wheat suffering from sub-par quality.

"That quality concern comes in the form of vomitoxin and the latency in getting the balance of the crop harvested," vomitoxin being a toxic fungal residue which can render crop unfit even for feed if present in sufficient quantities.

"It's bad enough to provide some limitations to the Canadian wheat export programme," Benson Quinn Commodities said.

That said, "I am not convinced it warrants what we have seen in the Minneapolis December contract the last couple of weeks".

Wheat vs corn

Still, winter wheat was performing better against corn, getting back a little of its premium which tumbled to a contract low thanks to Friday's USDA data on US crop stocks which, besides showing smaller-than-expected corn inventories, showed bigger-than-expected wheat reserves.

Indeed, returning to where we started, and corn market prospects, there is the factor of enhanced price competition with wheat to be taken into account.

At Chicago broker RJ O'Brien, Richard Feltes was not actually upbeat on the price outlook for either grain, without support from perhaps a weather scare over the South American corn crop currently being planted.

"Look for corn rallies—like wheat—to stall out," he said.

Hurricane worries

In New York, cotton futures for December extended their recovery, adding 0.3% to 69.89 cents a pound and nearly back above their 50-day moving average, helped by concerns over Hurricane Matthew making it to the US cotton belt.

"Forecasters now say the potential for Hurricane Matthew to make landfall in the Carolinas is now higher, and its impact larger," CBA's Tobin Gorey said.

"The accompanying rainfall will raise concerns over cotton areas in the south east US which have only recently dried down from Tropical Storm Hermine."

Heavy rain is falling in India too, although "at this stage it is seen to be as yield enhancing", said Sydney-based traders at Ecom.

However, if the inundation continues, "it may water log fields and have an impact on quality".