Corn Market Unphased By Production Drop, Large Chinese Buy; Here's Why

12:41PM Jul 10, 2020
Not only did USDA trim the new crop corn forecast, but the agency also confirmed Friday the second-biggest corn buy on record. U.S. Farm Report analysts explain why the market may be unphased by all the news.
( AgWeb )

The corn market seemed to get hit with good news Friday morning. USDA confirmed China made the second-largest, single-day U.S. corn buy on record. Of the 1.36 million metric tons purchased in corn, 765,000 of it is for the old crop.

However, the market didn’t seem fazed by the news, as corn prices turned lower after opening higher on Friday. 

“The market wasn't impressed,” says Brian Splitt of AgMarket.Net. “The news of the purchase came out between the overnight session and the reopening of the day session. There was a little bit of strength right on the reopen but that was sold into immediately. We do have a cooler weather forecast we're dealing with, but I think the trade has been anticipating the actual confirmation of this purchase.”

Splitt says rumors of big purchases from China have been surfacing for the past two weeks. In addition, China is starting to sell more of its state reserves at auction, and Splitt says when China does have those sales, 100% of the corn gets bought.

“We are wondering if this may be the ongoing larger part of a buy program that China may have more needs to cover.”

Yet, there were renewed doubts about China buying not just to meet Phase One, but efforts to work on Phase Two. Splitt thinks that also pressured the markets Friday.

News surfaced Friday that President Trump said Phase Two of the trade deal is unlikely and that the relationship with China has been severely damaged,” says Splitt. “We wonder how much of the selling that we're seeing is a combination of no good news from the report, weather forecasts that have shifted from looking support into values to now looking at a cooler, wetter bias going into the weekend. And now we've got reemerging concerns about the trade deal.”

John Payne, publisher of “This Week in Grain and Oilseeds,” says Friday's report from USDA had a bearish tone, because the trade is starting at hefty new crop stocks. USDA lowered its corn production forecast by 995 million bushels, based on the recent cut to acres, but that still puts the 2020 corn crop at 15 million bushels.

“We got the number – the initial kind of slap in the face number – for new crop for the first time,” says Payne. “USDA published the new acreage number with trend yields here. So, if things go well throughout the rest of the of the year, you're looking at a 2.6 million carryover for corn. Then, for soybeans they raised some stocks they're a drop in exports.”

Payne says in the short-term, the market is trading weather, but he thinks the trade isn’t impressed by the large purchase of corn from China because many more of those buys are still needed.

“The problem even with a Chinese purchase like this, is let's just average this and say it's a 50-million-bushel buy; the USDA, between now and the end of the marketing year, is basically penciled in a movement of 600 million bushels.  We haven't had a quarterly move more than 4 million. So, we have a lot to catch up.”

Storage Concerns

Payne says China has to buy way more than what it did Friday just to get the demand picture back to normal. In addition, he thinks the bearish sentiment in corn really sits with an issue in storing the crop.  With much of the old crop still on hand in places, storage could hinder prices heading into harvest this fall.

“At this point – and the only reason why I'm hesitant to get to short corn – is that it just feels like we're going to be having a game of musical chairs when it comes to storage, and that's going to keep prices well. You know, well-resisted at least through September in my opinion, even with a bullish weather story.”

Is the High for Corn Prices Already In?

Splitt says the technical side of the corn market seems to be pointing to lower corn prices, which means the high for the corn market may already be in.

“Post report release, we've taken out support at $3.47,” says Splitt. “That was the low that was made earlier in the week and taking that out, and closing below that, would not be a good technical sign. That's going to suggest that we've got a weekly double top: one week at $3.63 and the next week at $3.62. And having taken out the low in between those two highs would suggest that a major high has been made and that we're going to go back down and look for some lower values.”

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