I may be too optimistic about this year's corn crop. After writing an article on corn last month for Barchart, "Corn Trend: If You Build It, They Will Come," a significant seasonal buy did not materialize.
Typically when a pattern this consistent fails, prices fall. An example would be looking at the crude oil contract. A powerful seasonal rally usually occurs from January to May. Oil traded sideways through this seasonal window before collapsing from $84 to $64 basis of the June crude oil futures contract. Resulting in a mini-flash crash on the May 04 Globex open as positions were liquidated on margin calls by brokerage firms.
Source: Barchart
Other positive corn production factors are coming into play. The new crop soybean/corn ratio remains below 2'4 cents, which indicates more corn acres will be planted than soybeans. Brazil's second corn crop, foreign corn purchases are being canceled, China's economy continues to deteriorate, the US planting season is off to an above-average start, and the Commitment of Traders (COT) report is not showing significant accumulation in the current downtrend.
Brazil
Brazil produces two corn crops each season. The first one has been completed and harvested and is the much larger of the two. Argentina had a poor corn crop year, but Brazil had a bumper crop, increasing South American corn production this year by 6% greater than last. Brazil's crop production this year was large enough to cause trouble getting other commodities out of the country due to port bottlenecks and resulting in sugar prices to keep trading higher in their current bull market.
Brazil's second crop is facing some headwinds. Some of the second corn crop was planted late, resulting in a pollination period later in the growing season. By exposing the crop to two early touches of frost, farmers feel the crop could see damage if there is another frost during pollination. Fortunately, the pollination period is experiencing good moisture and should end mid-June.
Corn Exports
US corn exports continue to decline. The United States Department of Agriculture (USDA) recently reported a 315,000-ton reduction as China and other countries canceled previous tenders.
China's economy was expected to expand after eliminating zero-tolerance pandemic restrictions. The announcement caused a brief rally in the commodity markets. Soon, the world realized China would take much longer than overnight to return to an expanding economy. On May 08, reports revealed that China's year-over-year (YOY) exports were 8.5% falling from 14.8% the previous month. Their YOY imports were reported at -7.9% after 1.4% the last month. The current month's forecast was for a 1.1% increase.
US Planting Season
Source: USDA
Corn is planted each season during April and May and harvested from September through November, with the bulk of harvesting done in October. Weather is always a critical variable, but inclement weather during the planting season can cause delays in getting crops in the ground, much like Brazil is experiencing with its second corn crop.
The USDA reports that 49% of the corn has been planted compared to 26% last week. The 5-year average is 42% for this time of year, reflecting that corn is ahead of the planting schedule. Additionally, fertilizer prices are lower this year than at the same time last year, adding more nutrients to the ground.
The drought conditions for this year are much more favorable for the planting season than last year. The drought map reflects May 2023 (on the left) compared to May 2022, indicating adequate moisture in the ground compared to the previous year.
Source: National Drought Mitigation Center (University of Nebraska-Lincoln)
COT Report
The last report of traders' positions in corn futures revealed that the commercial traders (red line) were the least bullish, while remaining net short, than at any time in the past 52 weeks. In comparison, managed money traders (blue line) were more bearish and net short than any time in the past 52 weeks.
Source: Barchart
Typically when managed money is selling in a downtrend, the commercial traders build a long position by dollar cost averaging into the trend. The net position chart above suggests that this is the case.
However, when we look at gross positions compared to the net, we can see that the commercials are not adding to their long positions but merely buying to cover previous short positions.
Since the end of February, the commercials have been liquidating their shorts (red vertical lines) and some longs (blue vertical bars.) Resulting in a decline in gross positions as a percentage of the total open interest of corn.
Source: CMEGroup
On the other side of the trade, managed money traders add new short positions (red vertical bars) as the corn price decreases. Their percentage of gross positions is at a 52-week high (yellow line.)
Traders seem more bearish than bullish on upcoming corn prices even after the extensive downtrend. With the significant increase in new short positions by managed money last week, the market may be due for a slight correction and then resume the current downtrend.
In Closing….
On May 12, the USDA will release its monthly crop production and World Agricultural Supply-Demand Estimates (WASDE) report. The significance of this report related to the 15 reports throughout the year is in the top third. Based on this report, a baseline will be formed as we advance through the growing season. Could the market have anticipated a bearish report and sold off before the release? As traders say, "Sell the rumor, buy the fact."
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
