Why did corn trade limit down Tuesday? Why did corn trade limit up on Thursday? I am going to try to give my best understanding of what happened this week. I hope that I can make the narrative sound good enough to help you (and me) wrap my head around what is going on in this market. Whatever explanation I can give, no matter how detailed, will never come close to fully explaining why. No one person can ever fully understand. If there ever was such a person, we would not need the futures market at all, we would just need that person. No matter how small or how big the market move is, my explanation (and anyone else’s for that matter) is going to be a very watered down version of the whole truth. It has to be a much simplified version for me to get my HUMAN mind around it.
The limit down move came so fast it seemed like something major must have been announced. There was nothing major reported on the news wires so we called the floor to find out what they were hearing. The best guess we were able to come up with was rumors of Chinese cancellations. China has been announcing loudly they are going to crack down on “speculation” that they claim is artificially inflating their markets (I am more inclined to believe they are almost out of corn which is why it is over $11/bushel over there). The fear was that they would cancel some of the old crop purchases they had made because they did not need as much old corn. When we got the export sales report on Thursday, not only were there no major cancellations, there were more purchases of old crop corn and several sales that had previously been reported as unknown that were switched to China. So it seems like a pump fake by China. Speak loudly about cracking down and then when the market breaks, buy more. China has already bought more old crop corn than USDA has estimated for the whole marketing year and there are three months left. China has also already booked more than HALF the amount of corn USDA has estimated for NEXT year, and that crop is still three months from harvest.
There is a growing disconnect between the way USDA reports what is happening/going to happen and what actually happens. I am going to try to take the high road here and ignore any opinions of conspiracy about why it is happening. To try to point out the bigger picture here from both sides, it seems to me that China is spending a great deal of resources to game the system. They are playing our own rules against us; we are being outplayed. They realize how high the stakes are. They have to feed their people. They need to buy corn from us so they are going to do all they can to buy it as cheap as they can. Corn is over $11 in China, over $8 in Brazil and our new crop corn traded down to $5 this week.
This break flushed out the weak longs. Funds were massive sellers. As fast as these markets were going higher, no farmers were selling either. This break shook some cash bushels loose too as people got scared they missed the highs. If we have perfect weather for the rest of the growing season, there is a chance we have seen the highs. However, currently 25% of US corn acres are in some degree of a drought (see graphic below). Dry conditions at planting allows for a good stand of corn and condition ratings should be near all time highs next week to start off. However, we have a long growing season ahead and they need rain all summer long. There is no subsoil moisture reserves to pull from. The climate people I follow closely do not think there is going to be perfect weather all summer, but only time will tell who is right. The market sees rain falling now and trades accordingly. The rain falling in the Midwest added to pressure to the market over the last two weeks.
When we rally due to a planting delay, the market can explode higher but once the crop is in the ground it can quickly fall back to where it started. When we rally due to increased demand, the market can explode higher and once prices get high enough to hurt demand enough it can quickly fall back. This time we have both supply and demand issues. Animal feeding is not slowing down. Ethanol industry is buying $7 corn and still making record profits. China is buying as if their lives depended on it. We have not slowed demand one bit yet that I can see. I cannot swear we will make new highs, but I do not think this market is going down anywhere near where we started. There is way too much growing season ahead and the stakes are too high.
What To Do
I want everyone to be at least 25% priced on new crop beans and corn before the end of June. 25% is a moving target since we do not know our own yield yet. A good soaking rain would make us all feel better about that. You do not need to panic sell on a down day. $14 new crop beans and $6 new crop corn are still within reach.
Spring wheat has gotten plenty of rain over the last few weeks. Despite the cold weather and all the winter issues, the spring wheat tours have reported near record yield potential. As it continues to rain into harvest in some areas that may go backward. US wheat is competitive in the world market (or at least close to it). Wheat is being pulled into the feed ration. Some wheat has started to be harvested in the Southeast. The feeders are ready for it. Even some chicken mills are going to be using wheat. Corn wheat spread has come down to single digits. I do not think many of the flour millers realize how much wheat can get gone in the feed channel in the Southeast. This should be a fun decision for once. You can either ship your wheat at harvest to the feed channel for a great price or if you have good quality you can keep it and see what the flour mills have to pay later and should get a very good price later and hopefully a premium for keeping it. Either way you should win!
Exports this week were good. Strong demand is countered by more supply potential due to the crop saving rains in Texas. Cotton cannot find much direction. Cotton lost enough acres that demand improving should offset the bigger production but that may not correct tomorrow. We can still be patient on cotton.