Corn Market Update 10/18

[rayfcom]

Okay, been an interesting week so far in the corn market. The week started with the second of my 3-4 sell zones being touched, from which the market has pulled back moderately. Front contract December peaked at $3.785, and this morning touched down to a post-high price low of $3.70. The same low Volume and declining Open Interest that we have seen in corn since the up move in prices began in mid-September continues. The only change as far as that is concerned is that now both indicators are declining when prices move down as when prices move up. You will recall that Open Interest and Volume had been increasing when prices fell and decreasing when prices rose, putting the market on a weak foundation from which to start a price rally. What the market is saying is that fewer and fewer market participants are interested in transacting at current prices levels...the price is too low for the farmers (or their co-ops) to want to sell, and too high for the end users to want to buy.

Much of the present hesitation on the parts of market participants stems from the fundamental situation of the corn crop and harvest. We truly are at a crossroads, the direction from which that emerges becoming the directive that will drive prices going forward. The big questions are related to the week and a half of inclement weather that most corn growing States experienced two weeks ago. The National Harvest Report that was released this past Monday said the harvest continued during the wet weather but at a much slower pace than in prior weeks. About half of the States are at or slightly more complete with their harvest as compared with both last year and the five year average, but that is due to the early start that farmers had this year in harvesting and not due to any contribution from the last week. Crop quality was reported to be more or less unchanged, but that could change to the downside the longer the crop stays out in the field.

However, on the bright side, the weather in the corn growing States has improved during the last week, and that is creating an uncertainty in the market as to how well the harvest was able to re-start. Additionally, the market needs more data about crop quality to come up with a revised estimate for bushels per acre before making its collective judgment about where prices should be trading. 

Which all means that next Monday afternoon's harvest status report very well could be the most important one of the year to date, because it will be the first good look at whether what was reported six weeks ago to be a monster crop has dwindled due to weather. 

Another fundamental issue the market is grappling with is the pace of export sales. For much of September, the export inspections were roaring, leading many to believe that the demand for corn this year would be robust enough to absorb the huge crop in the field. But as I cautioned then, along with other commentators, was that due to the tariff issue, many foreign buyers of US corn were front loading their purchases to get in under the wire of further tariff threats. That is what surely seems to have happened, as export sales the past two weeks have been rather weak when compared with the month prior. The drop in export inspections has led many to conclude that prices have gone as far to the upside as they can go.

The technical picture as shown in price charts also remains mixed. Due to the drop in price off the highs that we have seen this week, the short term charts have become rather oversold, while the long term charts have just begun to turn bearish. Which is reflective of the uncertainty that grips the market right now regarding the short term trend for prices.

So where do we go from here ? My bet is that there will be some strong harvest numbers in the next harvest report, as farmers have worked their buns off this week so the world can have its muffins this winter. The slowdown in posts in this forum this week as compared to the last two supports this feeling. I think that some of the widespread talk about corn damage that I have heard from numerous sources will translate into lower yields when whatever amount of crop is finally brought in. Yet because there was such a huge crop in the field prior to the bad weather, there still will be a lot of supply to sell off to market when all is said and done.

I would not be surprised if the price top made earlier this week is the end of a good thing, however my market experience is telling me that there could be one more push higher before the bottom drops out. There are mathematical models I maintain that tell me there needs to be one more push up to the $3.80 to $3.85 area, and my technical charts seem to be begging for the market to make one last push up to the down-sloping trend line just above $4 just to create the chart pattern that will support the avalanche in prices that would follow. 

Frankly, its more of an intellectual curiosity at this point for me, and its why I look to set positions over a price region rather than at a specific price target. To me the big picture is that the market will move towards $3.29 and perhaps lower - a lot lower - so in such case it really doesn't matter to me if I sell at $3.60 or $3.80 or $4.00...the important thing is to use this price bounce to set up for the next big down move in prices. I am nearly half an intended position short now, with some dry powder to use should the market go higher or proceed lower from where we are today. And that's how I will stay until the price action tells me otherwise.

The only caution I have now is if you have not hedged some of your current production during the last month's price up move, you really do deserve to shoulder the burdens of what happens should prices fall significantly from here. If you have utilized this up move wisely, congratulations, you should be very happy with your decision within a few weeks. But that does not mean you finance work is done, be prepared for that one last up move if it comes, and take full advantage of it. 

[vrbuck]

Have you gotten anyone to buy into this drivel? It seems like you missed the bottom because it wasn’t cheap enough for you. You have been selling every dime higher in corn and fifty cents higher in beans. It will drop eventually then you can tell everyone how smart you are.

[rayfcom]

I have done better, I put my own money behind my trades.

I told you to start selling in the $3.60s, not at every dime...I gave you 4 specific sell zones all within half a dollar, and I told you the percentages you should sell at each level. And I told you the target, new lows for the move started back in May, which is somewhere around 40 to 70 cents lower than the average sale price. What more do I have to do to make you money, come out there and run the combine as well ?

And about a bottom, you won't see that for a year or two and it will be in the $2-$3 range...

[deasmatt90]

Rayfcom, first post very informative! Thanks. Last post about the low I totally disagree! Unless you are looking at the last month of trading in any one contract. Under those conditions I believe your low is possible. If my ability to find support is correct, our support for September 19 corn is 3.69 going into spring. Larger crop? Maybe. Larger demand ? I would say definitely. The rule of thumb for supply/use ratio is a drop below 10% for significant rally so I have read. We will be below that with next years crop. The ones creating the supply have no choice but to cut back production at these price levels. They cut back acreage this year, but with usda reporting the yields that they are, I believe there will be some surprised folks come early spring in regards to actual supply.

[vrbuck]

He is just making excuses for not calling the low. I have heard better excuses before. Now it isn’t a low if it rallies 70 cents. Enigma had better excuses

[deasmatt90]

I will not attempt to call low or high, anything is possible when in comes to any publicly traded commodity or stock? Wanna know the reason the market moves up or down? There is no reason! Rayfcom although I disagree with his low in the market is the only one on this site that has wrote about probability of profitable trades, and using a trading plan. In a previous post he spoke of this. Knowing the Probabilities of successful trades and having a trading plan are fundamentals that are used by professional traders. They are professional because they have a plan, know the odds of success, have the discipline to cut losses quickly, and let profitable trades run. Is he right on his call of the low or his call of the high? He doesn't know, and as a professional I'm sure he will admit this. he does however know his odds of success with his trading plan I'm sure. If he is wrong he will get out of his loosing trade quickly. If he is right he will let his profit run.

rayfcom, am I close? And can you give a price at with you will cut those loses?

[rayfcom]

Thanks, I am glad you found something good to glean from it.

As I have written before in this forum, corn and most other agricultural commodities are in a long term price downtrend, and will continue to be in such as long as the last major high at any time is not violated. Now I always write and analyze the market based on the front month futures contract at the time of my writing, And when I look at long term trends I look at the Continuous front month price chart, which is the aggregate of all prices traded while a contract was in the front month position., Right now, that front month is December, and when it expires in December, the March 19 contract will be front month. I will not watch March 19 prices until December expires. I use this methodology because it tends to eliminate the most time value from the prices traded in the futures contracts, so in essence I am always looking at a cash delivery for one of the next two or three calendar months. 

So in calling for new lows below $3, I am saying that sometime during the next year the contract in front month position will transact below $3. And thereafter, if I am correct, the front month futures contract for quite some time will trade between $2 and $3 a bushel, back to the price range that corn was in from 1988 through most of 2006. I cannot pinpoint an exact reason why this will happen the way Einstein relied on Math to develop relativity.

There are numerous reasons why I expect a return to the long term price range for corn. Some are macro-economic - when the global economy starts slowing under the weight of higher interest rates and a 10 year economic recovery/expansion, demand globally for food will decrease. Most of that is from the restaurant trade slowing down noticeably as it does every recession.The rest will be because countries on the economic margin, like China, will see a reduction in consumption as their trade surpluses shrink due to US tariffs and a general slowdown of everyone's economy. 

On the flip side of the coin, production of corn globally has increased significantly since corn hit that illustrious high in 2012 at $8.43, and now corn farmers are paying the price for it, victims of their own success. Production usually lags consumption in most industries, even more so in corn. On top of that, the shrinking margins in the corn industry have forced indebted farmers to plant more in order to  make up in volume what they are losing in price. Bottom line is that you are going to have at least one season where there is a great deal of overproduction, and the corn prices will reflect that dis-equilibrium, ushering in the return to the old price range for corn.

I would change my mind in a New York minute if the front corn contract could penetrate above the last major high price recorded at $4.1225 in May of this year. Breaking through an old top tells me that the fundamentals of corn are changing, as such changes will be reflected in market prices before we all know why those fundamentals are changing. But until that happens we have no choice but to plan for a continued bear market, and producers would be wise to sell expected production in advance whenever prices bounce from their downtrend such as what we have seen for the last month. 

I would caution you not to read too much into the supply/use ratio, as that is one aspect of the corn producer business that has become very efficient over time as a means of trying to stanch the bleeding inflicted on profit margins by a bear market for prices in an environment where costs stay stable or increase. Similar to inventory management systems that led to just in time inventory control, corn producers have done a good job in estimating their demand during the last several years, so the supply/use ration has fallen significantly. Yet wee know that there has been over-production due to good harvests for the last three years, and we also know that as supply/use ratios have fallen, so too have prices. Which leads me back to my cautionary note, supply/use ratios play little if any role in the determination of market price. 

As I wrote in my update earlier, I agree that the final corn yield numbers for this season may be lower than what USDA has led the market to believe. But it still will be a big crop coming after two big crops in a row. And that should also contribute to keeping pressure on prices to the downside through 2019. 

[rayfcom]

The market moved from $3.29 to $3.78, everyone's math other than yours calls that a 50 cent move, not a 70 cent move. And there was no low to call because the low has yet to be set except in your mind.

[rayfcom]

Yes, you are exactly correct. No one knows for sure what's going to happen, that's why we use charts (x-rays of the psychology of the market), analyze fundamentals, calculate probabilities and construct trading plans. 

As I wrote in earlier threads and posts, my idea that I came up with once the counter-trend rally began in mid-September was the market would trade back up to a level between $3.60 and slightly over $4, before going back down to test the fulfillment of a double top formation in the December contract at $3.29. My objective was to get short if possible at an average price of $3.80, scaling into the trade slowly and with progressively more contracts as price rose above $3.60. I scale into the trade in case I am wrong about how high the price will go, so if I am wrong on that estimation at least I will earn something for calling the correct direction. 

In my trades I try to earn at least twice what I am willing to risk, and never will do a trade where my reward to risk ratio is less that even money. So in this trade plan, I am looking to make the ~50 cents between my $3.80 sales objective and my $3.29 target price. I know that if the market trades above $4.1225 that the overall bear trend in corn prices probably is over, so my stop out is just slightly above the $4.1225. Thus I am risking 32.25 cents to make a profit of 50 cents, which is a reward to risk ratio of ~1.55 times. Not the greatest trade ever but acceptable. And once we get to $3.29,. I will have been evaluating the price action on the way down, and perhaps will have a different objective than what I thought when I first constructed the plan. If so I have the ability to alter the trade plan, perhaps only covering half of my short position and letting the rest ride for an additional move lower. 

The professional trader etches few parts of the trading plan in stone save for the stop loss orders.. Those should always be exercised at the prices you set when you made the plan, unless something that significantly challenges your initial suppositions. But for every other part of the trade plan, its very important to keep an objective and open mind to consider new information, and to be flexible enough to change positions in the market should the factors you employ to create your trade pan change in a significant way. The operative term is never get married to a position.                                                                                                                                     

[kyu2852570]

Thank you Ray! You have a lot of good information that these guys need to soak up, I know I’m listening and by the looks of things the last couple of days you have called it correctly