TOP FARMER WEEKLY PERSPECTIVE 2/17/2023 BY BRYAN DOHERTY
Corn Market: Ready to Move?
As winter has unfolded, expectations for higher volatility have been met by just the opposite. That is, we’ve seen low volatility in the corn market (due to countering fundamental factors) and money flow that seems to be complacent. The longer the market stays in a sideways trend, the more likely that, when prices do move, they will move in a more dramatic fashion, and the move could be higher or lower. This Perspective will look at the variables looming on the horizon that could have major impact.
Weather is, by far, the most dominant factor affecting the price of corn, and is responsible for small or record crops. Currently, it looks highly likely that Argentina will not produce an average crop, due to drought conditions. In the export world, this is important, as Argentina is one of the top three exporting countries behind the U.S. The focus then switches to Brazil, which has relied more heavily on its safrinha (second crop) for its export commitments to the world. The planting season, in essence, is late January through February. This time window depends on how quickly the soybean crop can be harvested, followed up by corn planting. The goal for Brazilian farmers is to plant as rapidly as possible in order to avoid high temperatures during the summer growing season. Consequently, the price of corn continues to hover in a sideways pattern until more weather in Brazil is digested. Then, the Northern Hemisphere (where nearly two-thirds of the world’s crop is produced) begins to loom larger as March and April approach. Planting in Louisiana and Texas will get underway in a couple of weeks. The drought monitor map continues to shrink, which would suggest the La Nina weather pattern is shifting to El Nino, implying a more normal-type weather for both Brazil and the Northern Hemisphere. Bears will argue that, without a weather scare, additional price premium will be lost on the futures market.
Another factor is the war in Ukraine. Since November, the corridor in the Black Sea for shipping grain has been open and has helped to keep the world supplied with inventories. With the war apparently escalating, no one knows with certainty how far along Ukrainian crop production will be by late spring or early summer. Many suggest the war is mainly to the east and the focus for production will be in the western regions of the country. The same labor and supply logistics that were hampering last year’s production are still there this year. We tip the scales toward expecting less-than-average corn production from Ukraine.
Lastly, money flow and feel for how the economy is progressing in the U.S. and the world will likely determine how aggressive traders (hedge fund managers) may resume purchasing contracts. Or, will they exit longs and eventually go net short if bullish fundamentals are lacking? Managed money remains a staunch holder of long positions in corn futures. If it looks like world supplies could be on the rise, expect a mass exodus.
The bottom line: there is significant uncertainty in the year ahead, as there is in most any year, and it starts with snug world supplies. Tight inventory suggests the bull spring is compressed. This winter, the spring appears to be losing its strength. If something doesn’t come along soon to excite bullish traders to own corn at already-high prices, it may be just a matter of time before prices slide. Producers should be very leery that the market could see significant volatility. At the same time, they should be prepared for prices to gradually decline over time. Anecdotal evidence of this is a decline in the wheat market this past year, where prices have continued to slide with a downturn in natural gas prices. Use strategy to manage the risk. Combinations of put purchases and cash contracts can protect the downside. Retaining ownership with call options, or leaving grain unpriced that is protected by puts, should also be explored. Take time before you get too busy in the field to have conversations with your advisor. Consider all risks and opportunities to design a strategy that works best for your operation.
If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.