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Some thing To Watch In Corn
The above article published on Friday makes a very good point in support of corn prices. While the last corn crop report from a few weeks ago reported a larger amount of crop than expected for this season, it also predicted a greater world demand for corn, to a degree that the latter would offset the former.
This may be a silver lining for corn prices, but what is suspect is that the increased global demand has not yet shown up in a key market indicator that would evidence the projected increased demand. That indicator is called Open Interest, which is the number of Futures Contract transactions that have been entered into but not closed as measured in numbers of contracts. When global demand for a commodity is increasing, end users and processors generally are quick to hedge this increased demand by locking up forward supply of the raw commodity they need to produce their product. As such, Open Interest is a rather real time way to confirm whether the demand predictions of government reports are actually being experienced in the marketplace.
The corn Open Interest numbers are significantly higher now than they were at the same time last year as measured by the amount of Open Interest in the front month futures contract. That's a clear sign that producers are taking in greater amounts of corn inventory than last year, in expectation of increased end user demand. That's the good news. The bad news is that based on these Open Interest numbers, producer and thus end user demand seem to have declined sharply this past summer. We have seen a small increase during the last month, but overall it seems that the corn market is telling us what other macro-economic numbers are saying : the growth of the global economy is beginning to slow down, finally starting to take a meaningful pause to refresh after ten years of virtually uninterrupted growth.
If the government predictions about global corn demand are correct, I will be expecting to see the Open Interest numbers increasing during the next several weeks and months. If that were to happen it should be a positive to support rising corn prices from where they are now. However, if the Open Interest does not rise, or worse yet, if it resumes its decline from this past summer, then the prospects for increasing demand begin to wither and the outlook for prices resumes a negative tone.
October will be a key month for corn demand and prices for one important reason. Historically, October has been one of the two months of the year when major stock market correction events have occurred. Stock market indices are pinning the needle at new historical highs as we enter this year's October...has the time come when the bulls decide to take some profits off the table ? Typically, a sharp downward correction in the price level of equity indices is accompanied by a likewise downward correction in commodity prices. While it remains to be seen whether equity prices will correct from record highs this October, what we can be certain about with a high degree of confidence is that should the equity markets retreat from present levels, corn prices will make a similar downward correction.
Something to watch as the leaves turn colors in the northern hemisphere...and something that combined with the failure of Open Interest in Corn Futures to reflect the optimism regarding global corn demand as reported in government crop reports leads me to be quite hesitant about getting bullish on corn prices now. Maybe I am being too particular in looking at the internals of the market, but I am reminded of an old adage in investing that I was taught when I was young in the industry and sure I knew everything there was to know...and a grizzled battle-tested and-worn old trader said to me "Fools rush in where Angels dare not tread". Its a good time to be very careful in the corn market.
