All eyes are on the August 12th USDA crop report for US Corn Futures. The question is how much the USDA will cut the estimated production for the 2019-2020 crop year. Analyst estimates are averaging about 13.19 billion bushels. Where the number comes in will likely determine the direction of the market for the near future, which is no surprise to traders. Nonetheless, there are a number of other factors currently facing the corn market.
Looking at the charts, December corn had a nice bounce off the $4.00 level. This comes after about a 70 cent decline from mid-June, which appears to be a bounce off the 62 percent retracement. It also looks like a head-and-shoulders sell pattern on the daily chart.
From the fundamental side, it sure looks and feels like a typical year to me where we have a weather scare in early summer, then the market peaks around early July and then the market is under pressure into harvest. However, there is a good argument to be made that corn production could be down substantially this year and the stocks/usage ratio could get fairly tight. This could warrant prices closer to $5 and not the $4 level.
There are two big concerns on the supply side. First, the farmers probably planted much less acreage than they intended. The weather was extremely wet during planting season. Traders believe the USDA will shave about 5-8 million acres off the Prospective Plantings report from March. The second concern is that much of the acreage that actually got planted was planted late. That tends to lead to lower yields and sets up for a late crop, which brings the threat of frost and freeze later in the season. The crop ratings have been averaging 10+ percentage points lower than the 10-year average, however, the gap has closed a little in recent weeks.
The threat of a substantial drop in the size of this year’s crop is real, but there are also some issues on the demand front that could tend to be more on the bearish side. China has been making news, but that is not unusual. The issues with the trade talks and tariffs are not a positive for corn at the current time. If a positive resolution was released in the near term that would be very positive for corn. However, I don’t see that happening. There are also questions on how China’s corn crop is fairing this year and how much they need to import. Either way, they will probably look to South America.
Weighing both the fundamental and technical sides, I would look to sell extended rallies at this point. Of course, that opinion could change dramatically based on the report Monday.
Chuck Kowalski
Past performance is not indicative of future results. Futures trading is not suitable for all investors. The risk associated with futures trading is substantial. Only risk capital should be used for these investments because you can lose all or more of your original investment.