Corn Approaching Key Support Level

[rayfcom]

Hello my farming friends, its been a while since I was here, basically because I had nothing to talk about as the Corn market has been very stable. That is now changing so I thought I would share some thoughts with you about where I see the market heading.

When last I left you, I was short about half to three quarters of a full position in March corn in the $3.70 to $3.80 area. I had written that as long as the front month futures contract in corn did not go higher than the 2018 high of $4.125 I was prepared to wait for a downmove which I felt had the chance to be quite substantial. I referred to a longer term triangle formation that had begun in early 2016 that had a downtrend line coming in right about $4 a bushel for the first half of 2019, and that if prices got up to test that downtrend line I thought it would be an ideal place to hedge 2019 production by selling futures in the later-2019 months. And I said that the uptrend line for the triangle would come in around $3.40 for the first half of 2019.

Nothing has changed, but the reason I am alerting you today is that May corn, which is front month, is getting close to the triangle uptrend line which comes in at $3.41 for April and $3.4225 for May. I expect that there will be some significant support at those areas the first time they are tested, and if they hold we still have a good chance to see the market finally test that downtrend line which is at $3.995 for April and $3.9825 for May.

Frankly I am surprised at the weakness in grain prices that has occurred over the last two months. I had been reading about how flooding was taking as muchh as a million acres offline during the last several months, and actually started to worry that my long term short position in corn was going to be taken out due to rising prices caused by the reduced supply from flooded acreage. 

For whatever reasons which still remain unclear to me, that did not happen and prices are now getting close to the aforementioned uptrend line of the triangle. So being that I have been in this short corn position for longer than most of the relationships I have had with women in my life, if we get close to that uptrend line I am going to say enough is enough, and take my profits just under the $3.45 level. And then I intend to watch for a while as the market is really oversold and the area between $3.29 and $3.42 has found buyers repeatedly during the last several years.

What I think is going on is global economic weakness that was foretold back in the 4th quarter of 2018 when stocks went into a tailspin for a few weeks. If it has any predictive relevance at all, the stock market has been pretty good over time at seeing where global economic conditions will be six months forward, and I think that is what we are seeing now. I expect that weakness in the global economy to continue a while longer, before the rise in the stock market that we have seen for the last few months translates into a stronger economy in the second half of this year. 

So if I had to make a guess, I would say that corn prices will stay weak for a few more months, but I don't expect them to take out the $3.29 to $3.42 support area we have experienced for the last several years. Now as you may remember, I have been looking for a big downside move in corn to the $2-$3 per bushel level at some time in the future. Surely, if the market trades below the $3.29 to $3.42 support area, that prediction of a drop below $3 probably will come to pass. However, I do not think this is the time when it will happen, because in order for prices to drop that much we would need a severe recession. And right now, I do not see such a recession in the cards. It will happen some time in the future, just not now. The economy and grain prices actually should be strong in the second half of the year, mirroring the bounce that the global economy should experience as foretold by the present rally in the stock market.

So I think this downmove in corn will come to an end during the next two months, finding a bottom in the old support area of $3.29 to $3.42, and in the second half of the year we should go higher.

As such, if you have hedged some portion of your 2019 production, I would take your profits and remove those hedges if corn trades below $3.45. It may look a bit mean down there, but I think if you hold on for a while, you will be selling your 2019 corn harvest for a substantially better price than the price where you remove your hedges. And the hedge profit will add on to whatever price you wind up selling.

As for me, I will be on the sidelines with respect to corn for probably the rest of the year. There are several markets where I think big moves are coming, especially the US Treasury market, where I think yields will fall a bit from where they are now, and then rise a lot during the second half of this year as the global economy rebounds. If you put a gun to my head during the next several months after corn trades below $3.45, and told me I had to put a trade on in corn, I would rather be long than short as long as the old support area holds. But I don't see enough of an uptrade to take a long bet on it. although I may change my mind after I see how the market reacts to the testing of the support area. 

But I think for the farm producers who don't trade corn for a living but grow it instead, you should find that the market will be kind to you in the second half of this year, and so I would be rather hesitant about selling any of your forward production anytime soon.

Good luck to all and I hope things turn out as I expect, because it would be nice to see everyone happy come harvest time.

[futurestrader92]

Couple questions for ya Ray

1) What do you think about the strong US dollar right now?

2) What makes you forecast a strong economy going through this year? 

3) What do you think about the large carryovers with the current trade atmosphere? Do you hear any rumors of trade resolution with china anytime soon? I haven't, that's why I ask. 

[ihtractortherap]

Good post there Ray. Nice call on the short!

[rayfcom]

1) The strong dollar I think is a result of investors being very bullish about the US stock market ever since the Federal Reserve said they were not going to raise interest rates for the rest of 2019. As the market reversed its downtrend on that news and began the move higher, capital fed the bull, and as stock prices continued rising, more capital sought to get on board. At some point the market will top out, and the dollar rally will end as well. I wish I knew where that point is.

2) Changes in Federal Reserve policy usually take anywhere from 9 to 23 months to exert their full effect, and I think the timing of the Fed's decision to stop raising rates was timed so as to ensure the US economy would not be a factor in the 2020 Presidential election. By leaving rates alone starting at the end of 2018, they sought to keep the economy steady from late 2019 through 2020. Combine that action with the huge increase is liquidity that the Chinese have made available to their slumping economy, and you have the fuel to re-start the engines of the world's two largest economies. 

Mind you, I believe it will be a sugar high, and that the let down afterward will be harsher than if the central banks of both countries had let their economies recess now and re-set. But you have to understand that governments now think they are investors in their own stock markets, and they will do everything they can to prop up those markets to prevent them from damaging consumer sentiment. So its not all too surprising that US and China have taken the actions they have to prop up their stock markets and their economies, even if the present actions cause more problems later. No one cares about later anymore, just the now and the near term. 

So because of these liquidity injections, you should see the US economy do well in the second half of 2019 and through 2020, which is what the stock market is betting in its move upward so far in 2019. The weakness you are presently seeing in some US economic indicators probably will turn out to be the pause that refreshes. Companies and consumers likely will be spending heavily again in the second half of this year. 

Remember another thing, these central banks can get away with this market manipulation and economic fine tuning for as long as they can keep consumer inflation under wraps. However the entire dynamic changes if consumer inflation heads upward. At that point central banks will need to tighten the screws for if they don;t their national currencies will plunge in value and the interest they will need to pay to borrow money will move sharply higher, increasing their debt burdens. I foresee this kind of dynamic unfolding during the next two years, as the strengthening economy boosts producer prices like as I expect in grains, and that filters through to the consumer prices. The Fed will not want to tighten in the months leading up to the Presidential election in 2020, which means long term bond yields will rise rather dramatically as the Fed fails to fight inflation. Once the election passes, the Fed will have to make up for lost time, they will tighten aggressively in 2021, and the long awaited recession after 11 years of recovery and expansion finally will occur in 2021.

3) I have been concerned about large carryovers in corn for most of the last year, and I think the present sell off in corn prices reflects the present reduction of inventory by smaller farming concerns leading into the May planting season. They need cash to pay for the raw materials they will need to plant this season and finally are throwing in the towel, which is what was the basis for me to hold my short corn position for as long as I have. Once the smaller concerns reduce inventories, which I think is happening now, only the larger and well-capitalized farming concerns will have over-sized inventories, and they will be willing to hold those inventories as long as the cost of borrowing remains low enough to make such inventory retention worthwhile. They will be the sellers when corn prices rise in the second half of this year, and the combined effect of that inventory liquidation with the crop planted this year will cause corn prices to make the big move down that I expect in 2020-2021. The recession I am looking for in 2021 will be the straw that breaks the camel's back and propels corn prices below $3 in 2021.

The trade situation...I don't expect any movement in that situation at least through the election of 2020. Trump will be even more difficult to deal with on trade as the election approaches, as this has been a major issue for him. Additionally, the Chinese also have no real impetus to make a deal on grains anytime soon, as their need to feed their livestock with American grains has been reduced substantially buy the current swine flu problem they have which supposedly is reducing their pig populations significantly. So the bottom line is that I don't think trade will have much impact on grain prices for the next year and a half, and prices will be influenced almost solely by economic factors in the US.

[rayfcom]

Thank you. 

btw, the market got really close - within 25 cents - of breaking through the $3.45 level I mentioned earlier, and so I started buying in some of my short position in the last hour (early morning trading in Asia). I am probably a bit early, but I learned a long time ago not to let a few ticks get in the way of taking profits. I still think we will go lower, and test the uptrend line of the triangle in the $3.42 area, and I think we will spend a while in the support zone before the market decides where it wants to go next. But if you are short and have a profit in the trade, its not a bad idea to start taking some of your money off the table now and leave it for the other players to fight the big fight that seems to be coming.

April 25 US morning...just as an update, I am now out of my corn positions with the market trading below $3.45. Please remember that I am not advocating being bullish here, just neutral. If you have been short as a hedge, my feeling is that its a good time to reduce or eliminate those hedges. My guess is we will spend the next few weeks testing the support zone of the last few years between $3.29 and $3.45, and then head higher., However, if we happen to go down and settle below $3.29 for a few days in a row, then I will become bearish again and probably re-set short positions. If you are a producer/corn farmer, I know it looks pretty ugly now and probably will for the next few weeks. But I think you will see better days in the second half of the year, so stick to what you were planning to do and don't worry. Things should look better by the time the stalks are eye level.

I will be back if I change my outlook. Best regards.