Corn prices have staged an impressive 85 cent recovery off the lows, which were established in the middle of December. Recall that corn prices topped in late August and spent the entire month of September working lower. The market then spent 40 days in recovery mode and managed to recover about 90 cents off the lows. Prices then began working back down in mid-November and by mid-December managed to bottom after posting fresh lows. The latest recovery, which appears to have just been completed this week, managed to recover 85 cents off the lows. While not conclusive yet, it appears highly likely that corn prices have now established another meaningful high. I have found it interesting that many analysts and traders who were bearish on the lows have recently turned bullish, right on the near term highs. It’s my opinion that the corn market has forged a major top and generally speaking will work lower in the months ahead.
The bearish corn factors can be listed as follows:
• The perception that corn demand is on the decline due to historically high prices.
• Expectations for reduced livestock numbers over the next year.
• Huge supplies of feed wheat available on the world market.
• The fact that wheat prices in the Black Sea are priced $20/tonne lower than corn prices.
• Increased acreage devoted to corn production outside of the U.S.
• Widespread expectations that U.S. producers will expand acreage devoted to corn production.
• Ethanol margins have narrowed recently.
• The firming tone to the U.S. dollar.
Whereas, on the other side of the coin, the possible bullish factors in the corn market are:
• Historically tight U.S. corn projected ending stocks.
• Back to back years of corn yields falling below trend line.
• Reports that the Chinese are looking to build their corn reserves in the months ahead.
• Drought in South America adversely impacting their corn crop.
• Fears of upcoming drought in the U.S. this Spring/Summer.
If I’m correct about the direction of corn prices, it’s unlikely that major resistance, defined as the range from $6.65 to $6.80, basis the front month corn contract, will be penetrated. On the other side, if prices indeed work lower, as I suspect they will, look for major support to develop in the $4.70-$4.90 range. It will likely take a major price changing event to drive corn prices back above $6.80. The USDA will provide a host of grain information on Thursday, January 12th. They will release their final crop production numbers for corn and soybeans harvested this fall, winter wheat seeding acreage information and quarterly grain stocks. The grain stocks figures have been totally unpredictable recently. Generally, the USDA is expected to reduce slightly the overall size of the U.S. corn crop and possibly also reduce slightly their projected corn ending stock figure. Thus, on paper, the report next week could be slightly bullish toward corn prices. In February, much of the talk will be focused on subsoil moisture conditions in the western corn belt and on acreage estimates. On March 30th, the USDA will issue their prospective plantings report.
March corn settled on January 5th at $6.43 ½. Traders may want to consider establishing bearish option strategies on rallies to, or above $6.50 in the March corn contract. I will be looking at new crop corn hedge strategies in the weeks ahead, as well.
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