Todd's Take

Corn Tumbles Lower, Strains Bullish Traders

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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July corn fell to its lowest close in three months on Monday, turning corn's price trend down and catching speculators with their largest holding of net longs since 2011. This is a bearish combination that is likely to prompt further selling. (DTN ProphetX chart)

Nearly a month ago, this column showed how corn prices deviated from their usual script and broke higher, thanks to drought in Brazil. (Read that column here:…) Brazil's second corn crop still needs rain and USDA's crop estimate of 87.0 million metric tons (2.21 billion bushels) for Brazil is likely to come down further on June 12 when USDA's next World Agricultural Supply and Demand Estimates (WASDE) report is released.

Compared to prices near $3.00 -- which is where DTN's national index of cash corn prices sat last fall -- Brazil's drought helped cash prices trade near $3.70 a bushel in May, and the opportunity for producers caught our attention. In DTN's closing market comment videos on May 2 and May 22 with DTN Senior Ag Meteorologist Bryce Anderson, I asked the question: "Are corn prices tempting yet?"

I pointed out how noncommercial traders were heavily long and the calendar was getting close to the time of year when seasonal highs are typically made. Now, looking back, we can say "yes," they must have been tempting to someone.

This year's droughts, first in Argentina and now in Brazil, have clearly been bullish influences for corn, helping take prices to their highest level in nearly two years. However, now in early June, that bullish impact appears to be fading as attention turns to the favorable early start that crops are getting in the U.S.

One week ago, USDA's first crop rating of 2018 showed 79% of corn crops rated good-to-excellent, giving DTN's Corn Condition Index a high score of 188. Late Monday, USDA's good-to-excellent rating slipped to 78%, but DTN's Corn Condition Index stayed at 188, now the highest score since 1994.

To be fair, crop ratings in early June don't mean a lot, as there is still a whole summer of weather ahead. However, in this case the higher crop ratings were accompanied by July corn's lowest close in three months on Monday -- a significant market clue of how perceptions are changing.

In addition to corn's trend now being down, Friday's CFTC data showed noncommercials net long 392,609 contracts as of May 29, among the largest bullish positions seen since 2011. Some of that bullish position has probably been trimmed, but, as a simple example, had noncommercials held pat since May 29, they would be down $378 million since last Tuesday. In other words, there is significant pressure on speculators to liquidate their large corn positions, and that is adding further stress to corn's bearish situation.

One market clue that seemed puzzling when Brazil's drought was still nudging corn prices higher was how the December/March corn spread gradually increased its carry after mid-March. Even while Brazil's corn crop estimates were coming down, commercials were showing no sign of concern about obtaining new-crop corn supplies. And now it looks like there was wisdom in their more bearish opinion.

Looking ahead, USDA's Acreage estimates on June 29 hold another slight bearish risk. This year's favorable weather in May means that prevented plantings should stay low and allow for slightly higher planting estimates for both corn and soybeans.

While the weight of the evidence for corn prices is now looking decisively bearish in early June, it is too early to be confident about how the rest of the season will go.

Patches of moderate drought in parts of the Western and central Corn Belt remain a concern, and next week's temperatures will be in the 90s Fahrenheit for much of the Western Corn Belt. Moderate showers in the seven-day forecast for most of the Corn Belt will likely offset the adverse impact of the hotter temperatures, but weather will once again have the final say, and small changes here or there can have big effects.

If the May 24 high of $4.12 1/4 in July corn turns out to be the high of 2018, we will have to admit that corn's seasonal trend was relevant again in 2017-18, as spot prices gained roughly 60 cents from early October 2017 to their May peak. There have been a lot of changes in the past 50 years, but so far, corn's seasonal tendency hasn't been one of them.

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Todd Hultman