The corn market, while strong fundamentally, has to work through some short-term problems before heading higher, an analyst says. Meanwhile, there's still some life left in old crop soybeans and enough uncertainty about new crop to perhaps reach new highs.
The beauty of the corn market is that even with the production of record U.S. crops, carryover has and will continue to decline because demand is growing at such a phenomenal rate, said David Kruse, Commstock Report, at the Ag Market Network's June teleconference.
Kruse said that for the short-term the corn market “is in an intermediate correction in what we believe is a long-term uptrend.”
USDA is projecting corn production of 10.43 billion bushels against usage of 10.5 billion bushels.
“We're looking at use for ethanol and sweeteners of 2.65 billion bushels. We still have many new ethanol plants in one stage of construction or another with plans for more.”
Feed users are making money and that usually means that feed usage won't decline, according to Kruse. “You don't really get major liquidation until someone in the (livestock) industries endures some losses, and currently all those industries are profitable.”
Kruse believes that USDA has slightly overestimated corn exports for this year. But longer term, the future brightens, especially for prospects in China. “They have drawn down tremendous, burdensome stocks over the recent years. Eventually, China will shift from an export competitor to corn importer. This will happen in the next couple of years.
“Basically, the world market is asking U.S. growers to produce record crops. As for this year, there's still a lot of uncertainty which could create some market fireworks at some point in the future,” Kruse said.
The uncertainty begins with plantings in the Corn Belt, according to Kruse. “Typically, if you're going to have a record crop, you need to get it in early. But a lot of the early corn in the northern Corn Belt was damaged.
“We've seen some record replanting, a million acres of corn and soybeans in Iowa. There was still a significant portion of the crop yet to emerge in Wisconsin and Michigan (as of mid-June).
“It's going to be difficult to exceed what the USDA is forecasting, when perhaps just a few weeks ago people were thinking 10.5 billion or 10.6 billion bushels.”
It's also difficult to say when the news will be digested by the market, notes Kruse. “USDA probably won't make the adjustment in the planted acres report (late June) and who knows when they will make the adjustment in the harvested acres — maybe next November, maybe in January. But I believe that the number that USDA comes in with is going to be at least slightly overstated.”
In the short term, a projected 860 million-bushel corn carryover means the market will not have to think about rationing, noted Kruse.
“Everyone is using corn currently and can continue to use corn at the pace of usage, and we don't have to make anybody quit. There's enough corn around to fill those needs this year.
“The threat for corn could come next year,” Kruse said. “We are requiring perpetual record corn crop production. If anything threatens this new corn crop, if it's 200 million to 300 million bushels down, it could be extremely explosive to the corn market at that time.”
Technically, the corn market is a correction in the short-term, “a primary fourth wave correction (of a five-wave Elliot Wave Sequence). We do not see this correction as having completed itself as of yet. So in the short term, we look for continued setbacks in the corn market. We see downside potential possibly to the $2.60 area for December. That would be a good time to be an aggressive buyer,” Kruse said.
“The fourth wave of the sequence will give way to a fifth wave, which will take it to a new high. That high in December corn is $3.41. Ultimately we see something coming out fundamentally to trigger that long-term move.
“So if you have old crop corn to sell, basically, they're going to try and steal it from you in the next few weeks. If you're vulnerable to that, take precautions. But longer term, we're not ready to do any pricing. We think there is a substantial upswing potential in these markets. Much better opportunities are ahead for corn.
Kruse noted that funds have a very large long position in corn, “137,000 contracts, according to the last report I saw. And that's a concern.”
To ration or not to ration — this is a big question hanging over the soybean market, noted Kruse.
“Usage has to be cut in old crop soybeans, and we haven't done so yet. We've been sort of whistling by the graveyard. End users are continuing to consume product at rates that are considered unsustainable relative to the supply.”
Much of this is due to a significant difference in attitude between Chicago and the cash market, according to Kruse. “We're seeing basis levels move to new records constantly. The cash market is trying to buy soybeans, and so far the futures market has been very slow to respond due to a fund liquidation phase we've been going through.
“I believe now that the funds have shed their length and as time moves on into the summer, we're going to see the cash markets become dominant again. And the cash market says there is a shortage of soybeans.
“We see a potential for the old crop to test old highs and perhaps make new highs during this rationing process.”
Kruse doesn't foresee much downside risk from present levels in new crop soybeans. “I wouldn't be an aggressive seller at this time. We have a chance of going back up and retesting some higher levels in the new crop, too.”
Kruse added that USDA's forecast of over 60 million metric tons of production for Brazil “is highly speculative. I take it with a grain of salt at this time. The history of Brazil is that they don't have as great a risk to cropping problems as we do.”
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