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When grain prices soared to new highs in the summer of 2012 it had a lasting effect on markets. High prices encouraged increases in planted acreage on a global scale and discouraged global demand. Corn is now faced with growing global supplies and a softer demand base. What this means is that the corn market has a job to do, or an agenda if you will, to find a balance between global supply and demand and prices are the most direct tool to achieve this.
Prices go higher or lower for a reason. In the case of the summer of 2012 corn prices had to go higher to slow down demand because drought cut our production short. Higher prices were necessary to "price ration" demand. In other words corn prices had to go higher to slow down demand because otherwise we would have run out of corn well before the new crop arrived. Price rationing in corn succeeded in slowing down demand enough that we did not run out of corn. Since 2013 corn prices have come down because corn supplies have increased after a better growing season. As corn supplies have increased the need to get the lost demand back has increased as well. So now the mission of the corn market is to encourage demand to grow and start to chip away at the big supplies.
To this point the corn market has done a fairly good job of buying that lost demand back. This week we were reminded of this with a huge weekly export sales number. In fact corn demand for feed, ethanol and export has risen sharply from where we were a year ago. The current USDA ending stocks projection is 1.631 billion bushels. A few months ago the market was concerned that corn would have over 2 billion bushel of ending stocks. This really highlights how demand has rebounded with lower corn prices. But, while the lower trend in ending stocks estimates is moving in the right direction the current USDA projection is still on the historically high end of the scale.
The question now is - what would happen to this newly rebuilt demand base if corn prices were to go higher? Well, there is really only one certain way to find out and that is to see what happens when corn prices go higher. Many times there will be a flurry of corn buying by end users at the onset of a rally as they work to fill their immediate needs before prices go higher. It is what happens after that is the big question. Will feed lots continue to feed as much corn if prices were fifty cents higher? Would ethanol plants continue at this pace? Would export sales remain strong?
Again, there is really only one way to find out for sure - higher corn prices. And, now that thoughts of a 2 billion bushel ending stocks number are behind us corn may very well just try to answer this question. There are a few reasons why corn may try to push higher in the near future, for one there is a record amount of corn being held on farm with producers holding on tight waiting for higher prices. The corn market may need to try to buy bushels out of the hands of the producer. This is a double edged sword however as when all this corn comes to market it will put pressure on prices and this could cause an avalanche of sorts. This certainly concerns me, but for later in the marketing year.
So, if corn were to rally 40-50 cents how would this effect demand? Well, if I had to take a guess I would say that it would have a big impact on demand. We saw how fickle demand is in the current global economic situation when corn was able to price ration better then we expected and at lower prices then we expected in 2012-2013. This is not like 2008 when higher prices did not have much of an effect on demand because collectively we were all willing to pay up to get what we wanted or needed. Now, we are mostly on a tighter budget looking to cut things out if they cost too much. The same likely goes for global grain end users.
I would think that corn demand could be a very fragile thing this year and maybe for a few years to come. If I were right about that any rally in corn would be limited to the point where we started to see demand fall off. What is that point? Again, there really is only one certain way to find out, but I would suspect that if corn were to approach $5.00 demand would soften dramatically. So, my advice to producers would be to sell a bit of cash corn on bounces and try to average in a price. At the same time I would recommend some sort of inexpensive floor in case the corn market decides to scare producers into selling their grain by sharply lower prices. Unfortunately sharply lower prices are sometimes the better motivator of cash movement so we are playing with fire a bit by holding record amounts of corn on farm.
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In the short term corn may want to go test its boundaries and see how elastic or inelastic demand is. However, corn demand is likely fragile so bounces my be limited. One way to find out, and now that the worst of the burdensome supply talk is behind us we just might find out.
Feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit.
March Corn Daily chart:
March Soybeans Daily chart:
March Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or firstname.lastname@example.org
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