Fundamentally Speaking

The corn market continues to recede with the March contract at its lowest level since it came on board at new contract lows. A record U.S. crop, expectations of decent South American production this year -- especially if Argentine output sees a big rebound from the drought-reduced totals a year ago -- and a very tepid demand scenario are more than enough reasons for the desultory price performance. Against this backdrop, there are a few reasons why corn may soon stabilize and perhaps move higher.

While the December 2023 contract has broken below the $4.50 region, it has since recovered, and the weekly corn chart shows strong support at this level. Furthermore, after a 30-cent break in the space of two weeks, the market is technically oversold and due for a bounce.

On a seasonal basis, corn starts to trend higher as we get to the end of the year -- even in years like this where ending stocks are ample.

Another factor is the possibility that wheat futures, which have been in a steady downtrend since peaking when Russia invaded Ukraine back in February 2022 and have fallen from over $13.75 to below $6 this past week, may be in the initial stages of bottoming. The ongoing weakness in wheat has been a bearish influence on corn.

There is also the possibility that South American corn production, more likely from Brazil, comes in well below expectations due to adverse growing conditions.

Finally, perhaps the one factor we are most concerned about is the funds have had their shortest position in corn since the spring of 2020, estimated at over 200,000 in combined futures and options.

Right now, there appears to be no reason to cover as the fundamentals for this market remain bearish. But should some catalyst push prices higher -- whatever that may be -- any up-move could be accentuated by fund short-covering. Studies we have done suggest that if the funds moved to a net-even position, the corn market could rally 40 to 50 cents.

This chart shows the net-fund position in corn with futures and options on the left-hand axis. The right-hand axis is the weekly price of spot corn in dollars per bushel. As of the latest Commitments of Traders report, the net-fund position was short 185,502 contracts and that is its largest short since the end of June 2020 -- though at that time spot corn was trading at $3.40. That marked the end of a six-year bearish period for corn between July 2014 and July 2020 when the average fund position was net-short 322,000 contacts with an average price of $3.67.

Joel Karlin, Ocean State Research

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