Todd's Take

Even though the Oct. 20 close in December corn was still slightly above the August low of $3.44 1/4, there was nothing about last week's 8 1/4-cent drop in prices that suggested the seasonal low in corn was in yet. What seemed more obvious is that corn prices are still adjusting to the notion that anecdotal reports of corn yields are higher-than-expected this fall and USDA's 14.28 billion bushel estimate from October could still nudge higher.

As easy as it is to blame corn prices' bearish predicament on a fifth consecutive big harvest and 2.34 billion bushels of estimated ending U.S. corn stocks, there is another bearish aspect to this story that is not being talked about as much -- current bearish outside influence for all commodities, grains included.

Before I explain the other bearish factors, let me mention this weekend's research. You may recall in my stories back in late August, "Grains Are Not Alone" (http://bit.ly/…) and Grains Are Not Alone, Part Two (http://bit.ly/…), I showed how we could use statistical tools of correlation to measure how much influence different factors had on corn prices. For example, we found that since 1997, changes in USDA's ending corn stocks-to-use ratios accounted for no more than 49% of the changes in corn's price.

Breaking the components of influence down further this weekend, I discovered over the same 20 years changes in USDA's U.S. production estimates accounted for no more than 23% and changes in USDA's estimates of U.S. corn demand account for no more than 31% of the changes in corn's prices.

The irony of course, is that we are currently in the time of year when production talk dominates 90% of the conversation. As mentioned earlier, it is easy to blame this fall's low prices on the anticipation of a big harvest. But if USDA's 16.4% estimate of corn's ending stocks-to-use ratio only accounts for less than half of the changes in corn's price, is it possible other factors are also weighing on corn prices?

The answer leans yes and exhibit A is the Economic Influence (EI) Index I explained in part two of "Grains Are Not Alone." The EI Index is a combination of gold and crude oil prices which reflects outside market influences and, over the past 20 years showed a correlation coefficient of 0.88 with corn which means that corn prices and the EI Index share common influence (R-squared value) of 77%.

The point here is that even though we tend to treat different commodities separately, commodity prices in general tend to move in synch with each other. For grains, it is especially important to keep an eye on gold and crude oil prices. Recently, crude oil prices have held steady, but December gold is down 6% from its high in September.

Among recent news stories, three candidates with bearish potential stand out. On Friday, the U.S. Senate passed a budget bill and moved closer to Republican plans for tax reform. The merits of a large tax cut are up for debate, but what seems fairly clear is that every step closer is driving more investment funds into the stock market and therefore, away from commodities. The Dow Jones Industrial Average finished last week above 23,000 points for the first time ever.

Last week's second bearish news story for commodities is President Donald Trump's choice to be the next chair at the Federal Reserve. Janet Yellen is the current head and her support for gradual rate hikes would seem to be a good fit for a president that wants to promote U.S. exports. But curiously, President Trump is also considering John Taylor, a Stanford economist who is known for wanting aggressive rate hikes.

It is difficult to make a case for significantly higher interest rates at a time when inflation remains low, but the possibility of a rate hawk at the top of the Fed is applying bearish pressure to gold prices and is pushing the U.S. dollar index near its highest prices in three months -- two bearish directions for grain prices.

The final piece of bearish news is potentially the most devastating for corn and that is the lack of progress after two months of renegotiations of the North American Free Trade Agreement. Just last week, USDA's weekly report of export sales showed Mexico among the top buyers of U.S. corn, wheat, sorghum, soybean oil and pork. Canada has been a consistent buyer of ethanol and biodiesel. It is difficult to imagine where U.S. grain markets would be without the beneficial framework that NAFTA has provided U.S. ag markets for 23 years.

Yes, this fall's big corn harvest is keeping corn prices under bearish pressure, but it's also important we don't lose sight of corn's other bearish influences. The three concerns described above can still go either way and you can be sure that we at DTN will continue to report on their progress.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman1

(CZ/ES)

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