Since early in January, corn futures have moved sharply lower, falling almost 80 cents in that time. The selling onslaught has been further fueled by the recent lockdown measures in an effort to slow the infection rate of COVID-19. The stay-at-home recommendations in the U.S. and worldwide sent gasoline, and hence ethanol, usage sharply downward, leading to large losses and closures of plants, as consumers slowed driving activity. The net effect was a huge drop in domestic corn demand at the same time that U.S. exports were also suffering. In that same period, managed funds have added to their net short. Is there a silver lining in the midst of all of the negativity? I have reason to believe there is.
July corn fell to a new contract low at the end of last week, and despite a Friday recovery, finished down 7 1/2 cents for the week. In the past six weeks, July corn has fallen 56 cents per bushel. In that time, managed funds have become emboldened with their growing netshort, by selling more and "long-only" index funds had also shed much of their length. Commercials (the smart money) got longer during that time, no doubt taking advantage of the cheapest corn prices in years.
Despite the sharp fall in ethanol production to just 570,000 barrels per day, the rise in ethanol inventory to a record large 27.5 million barrels, and spot crude oil futures to sub-$20 per barrel prices, the worst may be behind us.
The recent decision by the Trump administration along with state governors to reopen the United States in a staggered and selective fashion in phases, along with some promising results from the anti-viral drug Remdisivir and other virus treatments, is likely to result in more driving and more demand for gasoline and ethanol. This comes at a time when U.S. corn is very competitively priced in world markets, and the export gap versus last year has been closing each week. With Chinese corn prices perched at a 4-year high last week, there is some hope that China might ramp up its buying of more U.S. corn as part of the phase-one trade deal commitment.
Corn futures are becoming oversold. Of course, we all know that markets can remain overbought or oversold longer than most can figure. In the past week, the managed money funds were reported by the Commodity Futures Trading Commission (CFTC) to have sold an additional 27,000 contracts through Tuesday, putting them net short over 137,000 contracts. Index funds for the week sold another 7,500 contracts, while commercials bought corn (likely end users getting coverage). Fund followers estimate the funds to be holding a position to begin Monday April 20 of close to 190,000 contracts, inclusive of options. A look back at September 2019, when funds held a similar net-short position, shows what can result once they turn. We all know that when funds get overextended one way or the other, unwinding those large positions provides fuel for an opposite move in the market.
As we approach a volatile time period when planting accelerates and farmers head to the fields, if demand picks up as expected, it could be very challenging to buy cash corn. It is possible that a stronger basis as the result of that, and new export demand, could drive futures higher, but so can a delay in planting like what happened with last week's cool and wet pattern.
Also adding to the potential for a correction is the fact that the new-crop soybean-to-corn ratio, which had fallen to a low of 2.30 to 1 in mid-March, surged to 2.51 to 1 late last week, likely shifting some sizeable corn acres to soybeans.
Dryness in parts of Brazil and Argentina, also scaled back those crops, and Brazil will need some good rains soon to assure a large safrinha crop. As Brazil and Argentine virus infections grow, logistical problems could ensue, shifting some business back to the U.S.
So, with any of these potentially bullish developments leading to a short-covering rally, just how far can July corn go? The major resistance won't be found until $3.70 to $3.80, but with an overall bearish supply and demand scenario still overhanging the corn market, it is more likely that there will be solid resistance on a bounce to $3.50 to $3.60. On a more sobering note, and just to be cautious, in the event that demand continues to fall, a break and solid close below $3.18 on nearby corn, could send spot corn futures to the next major support area near $3.01.
Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of commodities or commodity futures involves substantial risk and are not suitable for everyone.
Dana Mantini can be reached at email@example.com
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