TOP FARMER WEEKLY PERSPECTIVE 8/14/20 BY BRYAN DOHERTY
Bullish Argument for Corn
As mid-August approaches, this year’s crops are on the verge of being record large with record yield. For many producers, the timely rains, ample sunshine, a good start to the planting season may lead to their best crop ever. The trend for prices remains lower and political uncertainty significant. COVID and a washout in energy prices exacerbated negative price activity. Fund managers sold the trend in March and added positions in spring, anticipating a good start to the season. It was a rough time and the effects are still being felt as the crop inches closer to maturity. Yet, there may be a more friendly argument brewing for corn prices. In this Perspective, we’ll try and address some of the potential positives.
Corn prices are good value to end users. What is good value? If you can buy a product for less than it costs to produce, then it is a good value. From a historical perspective, prices are low and trading near recent harvest lows from the past several years. The determining factor for crop size this year will be final yield results. The most recent USDA report estimated a new record yield at 181.8 bushels per acre. Is this old news, or will the weight of a big crop continue to pressure prices? Only time will tell. Other factors at play, including the possibility that this week’s big yield and crop estimate are already old news and factored in the price, might suggest the market is probing for a low.
Specifically, we want to explore the demand side of the market. The past 18 months have been dismal for demand expectations, as factors such as energy waivers, COVID-19, lower energy prices, and a technical picture that encourages additional selling, all weighed on price. Yet, with China, there is a trade agreement in place and in theory a lot of money that needs to be spent over the next several months. China’s corn crop is said to be diminished, due to significant flooding as well as some damage due to army cutworms. The government has issued reserves to the tune of perhaps 40 million metric tons to meet growing demand from an increasing hog population. Remember, it was only 18 months ago that China’s hog herd was imploding due to African swine fever. If you’re connecting the dots, there is a potential that China, who has already purchased nearly 7 million metric tons of corn from the US, could make additional purchases.
Let’s add one more element that could be impactful: the value of the US dollar, which has sunk to two-year low levels. Should this trend continue, US corn could become a very sought-after commodity. The US dollar is often considered the swing vote for exports, and the swing has moved in favor of the US selling corn overseas. Additionally, South American supplies will be diminished over the next several months at a time when US supplies become more readily available. There is also the chance that investors begin to look elsewhere for investments other than equities, which have recovered nearly all their losses incurred earlier in the year. Gold and silver have hit record-high prices and recently have been viewed as “over-valued.” Interest rates remain low, implying debt instruments offer little return. Agriculture products at low prices could attract the investment community.
While the likelihood of a strong price rally currently remains low, it is important to realize just how low corn prices are and the value they bring to buyers as well as investors. A lack of farmer selling and a pick-up in exports will likely occur soon. Overseas demand and stronger internal usage are activities that usually occur when prices are finding a bottom. If funds were to move out of short positions and go net long, this could change the picture significantly. The old saying is low prices cure low prices. There is little debate that prices are low and demand is growing. Additionally, there is not much of an incentive for the world to increase supplies. We are starting to connect the dots that lead to a price recovery.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.
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.