Last week I advised growers to pencil out what they needed for a profit, adding: “While there’s no telling how long the rally will last or how far it will go, most times the flames burn out quickly.”
The market’s 30-cent break this week seemed to confirm those fears. A bearish USDA report coupled with forecasts for wetter conditions into the end of July tipped over the market like a house of cards.
If you’ve read my previous studies about weather rallies and selling signals, the break exhibits many of the classic signs of a top. These include:
- December futures posted a bearish key reversal lower from new highs on Tuesday and also showed divergence with the RSI momentum indicator, which failed to make a new high
- The market then broke through a two-week uptrend line drawn off lows on USDA report day, violating moving averages on follow-through selling Thursday.
- Implied volatility in the options market surged, then broke sharply
- Much of the buying came from short covering by funds, not new demand from end users
If there’s a ray of hope for higher prices, it comes from one of the selling signals that has not yet been tripped, which is based on fundamentals of supply and demand, not technicals favored by chart traders. Crop ratings were still dropping this week. Ultimately, that could sow the seeds for a rebound.
First, though, the market must clear out weak longs and induce some panic selling by growers still stuck with old crop inventory. Unless forecasts turn back hot and dry very quickly, this flushing could take a couple of weeks.
For the record, USDA increased its estimates of both old and new crop carryout more than expected, based on June 30 reports. Those showed greater than expected June 1 inventories, suggesting weaker feed usage, and an increase in planted acreage of about 1 million. USDA as expected kept its yield unchanged at 170.7 bpa. The changes were offset only by a token increase in new crop demand.
If yields come in where USDA’s is at – a “normal” crop – fundamentals suggest the high is indeed in according to my price models. USDA likely is too low on old crop feed usage and exports, but may be too high on usage for ethanol demand unless efficiency at plants drops during the summer. But the key is weather and yield for new crop.
The Vegetation Health Index for corn shows little improvement, pointing to yields below 164 bpa. USDA’s first survey based estimate Aug. 10 will be the first test of that assumption. If heat stays around for grain fill as some weather models suggest, yields could be below average for the first time since the 2012 drought.
Weather around the world doesn’t look too threatening so far. USDA left its estimate of Chinese production unchanged, but the VHI suggests yields should be lower. That won’t make much difference because the country has huge inventories Ukraine appears to be muddling through, with maybe average or a little less yields. South America is a question mark. It’s the dry season in Brazil, but rainfall has been below average, a trend worth watching into the fall.
I’ve recommended being sold out of old crop. December futures rallied enough for initial sales of 20% but not far enough to allow more protection with options. I also recommended getting started on 2018 sales with a 10% sale. With prices at unprofitable levels, it’s not prudent to chase the market lower now.
For the complete version of this outlook, including supply and demand tables and graphics, along with price charts, click the “Download” button below.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on corn farming, basis, energy, fertilizer and financial markets feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
For more corn news, corn crop scouting information and corn diseases to watch for, follow Tom Bechman's column, Corn Illustrated Weekly, published every Tuesday.