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Published May 03, 2011, 01:45 PM

Considering the corn market

The corn market has seen index fund liquidation every day this past week. April 28, index funds sold an estimated 40,000 corn contracts, 10,000 contracts of soybeans, 6,000 contracts of wheat, 3,000 contracts of soymeal and 5,000 contracts of soyoil.

Considering the corn market

The corn market has seen index fund liquidation every day this past week. April 28, index funds sold an estimated 40,000 corn contracts, 10,000 contracts of soybeans, 6,000 contracts of wheat, 3,000 contracts of soymeal and 5,000 contracts of soyoil.

Many analysts think that first notice day of delivery, April 29, along with end of the month position squaring was the cause of such a drastic drop in futures. Perhaps, but I am not really buying into that thought process. A forecast of improving weather in the Midwest is giving to estimates of corn planting progress May 2 at 17 percent to 18 percent. We all know how quickly farmers can sock corn in the ground with today’s large equipment. After concerns of a late spring, farmers will not slow down on planting until they are done. Farmers love to plant corn, and with the crop insurance floor of $6.01, they will make every effort to plant — even if they have to mud it in. Perhaps the best indication of all was that corn futures were unable to make new highs early last week, when the forecast was dubious as to when spring plantings would get a good start.

Since April 1’s gap higher day, corn has not been able to move decisively higher. If, by May 8, corn plantings are 39 percent or less, the 2011 U.S. corn planting pace will be the third- slowest since 1985. Seasonals have sell recommendations on July wheat and September corn on May 11 and 12. It is not uncommon to see soybeans weak into May in years such as this.

Export sales are slowing on corn, and this has helped the seller. Corn had found minor support against the lower channel line that has held lows since the low of the gap higher day of April 1. Taking that out could do chart damage and a 60-cent decline will have the bulls cautious until weather occurs to feel the need for a weather premium through the most important part of the growing season.

Many analysts would advise against reading too much into the current decline, attributing the break to the end of the month. While the speech by Federal Reserve Chairman Ben Bernanke did not really say anything bearish to commodities, he did mention that commodity inflation should be transitory, and that may have prompted more near term liquidation. The wheat market is laboring under prospects of a rebound in Black Sea wheat production, talk of fading food inflation and harvest just around the corner.

Furthermore, the Kansas wheat tour starts soon. Kansas is the No. 1 hard red winter wheat producer in the U.S., and some fear talk of better-than-expected yields. Technically, July corn found support April 28 at a 40-day moving average that coincides with the bottom Bollinger band.

However, the Bollinger bands are narrowing on the daily charts, and that is indicative of a change in behavior. My thought is that it will slip to the down side. Other negatives for corn are that, with all this moisture, corn will have some reserves to handle some of the summer stress, providing heat doesn’t come to stay.

Add in talk of negative ethanol plant margins and that, too, may be adding to the near term liquidation. Bottom line: Is the liquidation done? I hesitate to think so.

Asset class managers continue to display skepticism over the negative effect of the administration’s agenda on business, wealth creation prospects for meaningful debt reduction, and the U.S.’s demonstrated policy of “leading from behind” on international affairs. If nothing else, all these concerns lead to a slowdown in the corn market for now.

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