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11-08-2018 11:58 AM
Okay folks, I am not going to waste time witht he details of the Crop Yield report released about 45 minutes ago. The reason is because there is only one number that matters : the World Endstocks for 2018/19. That number was supposed to come in at about 158 million bushels. Instead in was reported at 307.5 million. At first it seems to be a typo since it was so out of line, But then the details emerged.
It seems the USDA has been uncercounting the inventories of corn held by the Chinese. I don't know how or why they iunder-counted or how they made up for the oversight, but the bottom line is that USDA now says China owns about a hundred million more bushels of corn than was previously thought. Which means that China does not have to take a major buying presence in the corn market until 2020 at the earliest.
The market initially took a spike up to the $3.79 price before traders realized the World Endstock number was not a mistake. Then prices dove down to the mid-$3.60s, where they sit as I write.
Fundamentally this news could not be worse. Even though current yields for the harvest underway were cut to 178 bushels per acre, its very hard for a market to handle an increase of a hundred million bushels that it previously did not know about.
So from a fundamental standpoint we surely have to be more than concerned about where prices go from here. From a technical standpoint, the market has had what we call an "outside day" - higher high and lower low than the prior day. What will be all important is today's closing price...if its lower than yesterday's low at $3.71, that would be a very bearish sign for the immediate future.
What to do from here....since I am already short 60% of my target, I am not in a real rush to do a kneejerk reaction,. But I have to say that if we close below that $3.71 today, I will have very little confidence that we see a higher price than the $3.79 where the market stopped at the highs today. If I was not short, or just a bit short, I would start selling aggressively if the market closes below $3.71 today.
I still maintain that for the market to really move lower, we need to take out the $3.60 and then the $3.54 levels. I believe we now have the ammunition fundamentally to make that move. The question is are the computer traders and big funds going to get on board the train, or are they going to play games still with the market as they have been doing since September. The volume and open interest numbers in the futures contract tell me there's a lot of corn that has not yet been sold. So my advice is that if the market closes today under $3.71, and you have not sold 50% of your present production yet, you should get on board now in the mid-$3.60s. The risks are greater for the downside than upside with today's news, If we break down below $3.60, sell another 25%, and below $3.54, sell the rest. Frankly, if you want to sell more in the mid-$3,60s than 50%, I would not be against that strategy.
If the market closes above $3.71, you still may have a chance to get higher. Its becoming a bit of a longshot, but the chance still remains. In such case, we will watch to see how the market acts during the next few days.
Right now the corn market feels like a guy who just had a severe heart attack, and his doctors are watching him closely for the next few days to see whether he will live or die. That's how much of a shock the market has taken today. The next few days will tell if it was enough of a shock to re-ignite the long term bear market.
11-08-2018 02:12 PM - edited 11-08-2018 02:21 PM
rayfcom, I do not view the data as bearish as you do, but that's what makes the markets work. CZ under $3.60 would be undervalued at the current stocks/use.
I believe you have the world numbers wrong. China has about 150MMT more than the trade expected, or 6 billion bushels. (not the 100 million bushels you stated)
Still, look at recent years and compare the price of corn to US stocks/use. Front-month futures should approach $4.00 by May, higher by July with a weather issue.
11-08-2018 04:02 PM - edited 11-08-2018 04:20 PM
I think a lot of this calculation is based on the verifiable export numbers that were recorded in shipments to China. I have to say that this increase in Chinese Endstocks was not a total surprise, as a major commodity analyst at a large commodity investment firm had been predicting for some time that the Chinese Endstock number was about 100 million metric tons too low.
Additionally, this report is validated by what happened in the first half of this year, when corn prices rose sharply even though reports in the field said silos and grain elevators were stuffed to the brim. It was the Chinese buying up the futures which in turn reduced the stocks, and when the Chinese stopped buying in May, prices tumbled. It probably took a hundred million metric tons of buying to drive prices as high as they went in the first half of 2018, so in light of that market move these Chinese Endstock numbers make sense.
11-08-2018 04:17 PM
Yes, you are correct, my initial reading of the World Endstocks should have been in metric tons. But even still, 6 billion bushels is the equivalent of 1.2 million futures contracts. That's 70% of the total Open Interest in the corn futures market. Saying that 1.2 million contracts of demand has just left the market is the same as saaying someone is going to sell 1.2 million new contracts of corn futures. There's no way the market can rise under that kind of selling pressure, or with such a reduction in assumed demand.
I do not place any value in the stocks/use numbers, because they do not affect the price of corn. In fact, the opposite correlation is correct...as price changes, the stocks to use ratio changes, That's because as prices drop, the stocks drop as buyers progressively step up and buy the bargains for future use. As prices rise, stocks drop as holders of stocks take advantage of the better price. The prices drive the inventory, not the other way around. The reason that stocks to use is so low now is because the market has been falling in price for 6 straight years.
Bottom line is there is a lot more corn in the world than most anyone expected and for what has been priced into the corn market. You've just taken 1.2 million futures contracts of demand out of the market for the next year at least, and you have what still amounts to a very large harvest coming to market. You have a corn market that's been in a bearish trend for six years, and a world that has a lot more supply than thought. Now perhaps demand is a lot bigger than estimated, because that's the only way aside from a volcano erupting in Yellowstone that corn is going to turn into a bullish market under present conditions.
I have written here that there is a chance we see a bit over $4 in the front contract during the next few months, even if the fundamentals don't support it. The market is small enough that a couple of billion dollars from a fund or funds working together can manipulate it. But if we get to $4 and fail, bar the door because the next stop will be under $3, and very likely into the low $2 per bushel. That's what the long term charts are pointing to, and if we get the recession I am expecting in the second half of 2019, those levels will easily be in reach.
On the other hand, by the work of some miracle or act of God, if corn prices rise above last May's front contract highs of $4.1225, then I will start banging the table that corn is a screaming buy.
My money still remains on the market making a major corrective top in the $3.60 to $4 area, after which prices get hurt badly.
11-08-2018 07:11 PM
Anyone in the free world is crazy to believe ANY propaganda that comes out of China.
It wouldn't surprise me at all that in the next few days (after announcing bearish news to our corn market) we learn that China actually made a purchase of corn somewhere in the world at a discounted price.
11-08-2018 07:42 PM - edited 11-08-2018 07:44 PM
What large producer would have sold it to them at a discount and why ? What was the benefit the producer gained by selling below the market ?
11-08-2018 08:55 PM
China has been known to put out information in the past that has affected the soybean market. They have cancelled soybean purchases only to buy them back after the market reacts lower to their cancellation news. I'm sure they could do the same thing with any other commodity.
11-09-2018 06:28 AM
Do you think that the USDA simply takes the information fed to them by the Chinese for inclusion in their monthly Endstock estimate ? Or do they seek to calculate that number with their own methodology, like through examination of past Export reports ? As I wrote to another fellow who posted here on that topic, this news was not a complete surprise, as a well-known analyst of the corn market who writes for a major commodity investment firm has been forecasting for quite some time the change in World Endstocks that USDA reported yesterday, based on his own methodology of calculating World and Chinese Endstocks.
This Endstock news also explains the rally in corn prices that occurred after last year's harvest, even though at the time crop yield reports had indicated a substantial harvested supply after the 2017 harvest. Prices rallied sharply in the face of that increased supply because the Chinese seemingly were huge buyers of corn at the time.
11-09-2018 07:56 AM - edited 11-09-2018 07:59 AM
I'm sure that the USDA uses their own methodology. We see the market's belief in that methodology after every report.
Prices rallied sharply after the 2017 harvest? I guess I missed that one.
Plus, I don't recall ANY news reporting that China bought corn. Not saying you're wrong....just that I don't recall that news.
The magical 150-300 million bushels that USDA finds or loses in many of their reports are no accident. It is their way of backing in to the final numbers they want or correcting substantial errors on previous reports. They have a hard job as they are constantly trying to hit the moving target of grain supply numbers and yet keep food plentiful and affordable.
Ray, I do enjoy your informational posts. At least we have a place to gather more marketing information.