By Brian Doidge, Market Analyst, Ridgetown College/University of Guelph
June 16, 2000
U.S. and WORLD:
It’s always darkest before the dawn, or so the old sailing adage goes. In the two months since our last issue, Chicago futures contracts have lost about 30 cents in the nearbys and 25 cents in the new crop. It hasn’t always been down, with a nice rally higher early in May. However, when the rains from early May onward started to cross the dry areas of the western and central corn belt they had previously avoided, Chicago markets slid lower with the darkening skies.
The question now is, have they bottomed?
No.
Will they go lower?
Perhaps.
When?
Likely not now, but probably later in the summer and early harvest period.
If prices perhaps won’t move lower now, will they rally?
Yes.
When?
Likely soon.
Here’s my thinking.
The most recent NOAA/USDA/NWS Drought monitor map (June 15) shows that the drought area of central Missouri actually got worse – not better, as might have been expected by Chicago traders given rain maps through May and early June showing storms tracking through the area. Drought there (although important to those folks who live there) is not a significantly large enough area to have a dramatic impact on total U.S. corn production. However, the droughty parts of Nebraska, Iowa, Illinois and Indiana also did not shrink as one might expect. The data could be faulty or slow to respond, or it might suggest that rainfall coverage has been spotty and not enough to provide more than immediate relief. Longer-term Palmer Drought Index maps (latest June 10) still show the central corn belt suffering moderate to severe drought. Moreover, the latest 3-5 day, 6-10 day (June 20-24), 30-day, and 90-day weather forecasts all call for drier and warmer across the heart of the corn belt. Additionally, the most recent NOAA data on Pacific Ocean water temperatures (through May) show a dramatic and significant cooling since January. Previous years showing such a similar strengthening of La Nina are 1988, 1992, and 1998.
This is not to say that a mid- to late-summer drought is on the way. But there are enough inferences that Chicago traders may consider the recent 30-cent collapse from early May to have removed sufficient weather premium. Another sign: almost all the major down-price days since early May have occurred in conjunction with declines in Open Interest. This means that spec funds were selling out of long positions. No trend can continue unless new players are coming into the market, supporting the direction of the trend. Had this been the case in the recent down market, new players (who would have been coming in selling, to drive prices lower) entering the market would have pushed Open Interest higher. This suggests that we are close to a short-term bottom.
More
inferences. U.S. export sales have been increasing as Chicago markets have dropped.
Sales of old crop have exceeded 35-million bushels the last three weeks, exceeding
the level needed to meet the USDA’s most recent (June 9) projection. As a result,
basis at the Gulf has been moving higher, to attract corn to meet shipment commitments.
Strength in export sales likely is the reason for the USDA’s 100-million bushel
increase in 2000/01 export projections in the June 9 Supply & Demand report.
Also helping are continued increases in feed usage. In the June 9 report, both
old and new crop feed usages were increased 25-million bushels. Moreover, the
June 16 Cattle on Feed report is expected to show inventory on feed up at least
eight per cent from one year ago. Adding more upward pressure is the June 16 release
of SPARKS’ estimate on planted acreage showing a 70,000-acre reduction in U.S.
corn acreage (and a 110,000-acre cut in soybeans).Put it all together, and Chicago seems ripe for a modest rally from life-of-contract lows established June 14. Don’t look for anything earth-shaking, but reward this rally with more old crop sales if you still have anything left.
Ontario:
In Ontario, shipments of corn to the U.S. and overseas continue. This causes occasional spurts higher in FOB farm bids when corn is needed to meet commitments. Basis, adjusted for exchange variation, is starting to work higher compared to year ago, but remains considerably below the long-term average in both old crop and new. For old crop, this is due to the large crop and the fact that the trade knows many farmers have held stocks longer...and that there is a lot of corn still out there.
New crop, however, has a distinct probability to move up. Planting has been difficult and we’ll be lucky if we match last year’s 1.81-million acres. Increased domestic usage requires a crop of about 230-million bushels just to meet feed and industrial demand in the province. We were previously projecting a five- to eight-per cent increase in corn acreage (well down from StatsCan’s incredible 14 per cent projection) which required only average yields to achieve a 230-million bushel crop. Now, if planting is only about 1.8-million acres, we need to match last year’s 128.3 bu/ac average yield (second highest ever). That seems a tall order given the late planting, uneven stand, heavy rains of late, nitrogen losses, high probability of high moisture content at harvest and increased risk of frost damage this fall. The result is that new crop basis could well move higher.