07 Nov
2018

Corn – wet ears

Categories: Daily Comments

Corn – wet ears

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October 12, 2018

The December US Corn futures contract rose to $370 yesterday from around $343 on September 18th, signalling what may be the beginning of a bullish trend in corn futures prices. Amid still strong production forecasts various factors are converging to push prices higher.

Contributing to the rise of corn prices was the US Department of Agriculture’s (USDA) monthly World Agriculture Supply and Demand Estimates (WASDE) report yesterday, which missed expectations with a reduction in expected US corn yields. Analysts had expected the US corn production estimate to come in at 14.859 billion bushels, but the estimate fell in October to 14.778 billion bushels from 14.827 billion in September.

Trade wars between the US and China are distorting market fundamentals in agricultural commodities. The US produces the most corn in the world and is a main exporter of other agricultural products. China is also a main agricultural producer, but with the world’s largest population it faces supply constraints and soil pollutions problems.  As trade wars carry on geopolitical issues, as well as supply and demand numbers, will affect agricultural commodity prices. 

The USDA reported that private exporters received corn order cancellations of 5.5 million bushels for 2018-19, this could be seen as evidence of market disruption. However, corn prices pushed higher after the signing of the US-Mexico-Canada Agreement (USMCA), which replaces NAFTA and keeps the Canadian and Mexican markets open to US exports.

Another factor contributing to higher prices and market disruption is the weather. Heavy rains throughout farming regions in the US have started to take a toll on this year’s corps, some corn has begun to fall over and rot due to water logged fields. Rainy weather has also pushed up the water levels on the Mississippi river, forcing lock closures and stalling shipping from the mid-west to the Gulf of Mexico where corn is exported.

The price of ethanol has risen from very low levels recently as the price of oil has increased, ethanol can be used as a substitute for oil, and corn is the main ingredient in biofuel. The Energy Policy Act of 2005 started the Renewable Fuel Standard which mandates the partial use of biofuel in the US, this policy serves to support the price of corn.

If crop production estimates continue to fall amidst rainy weather and intensifying trade wars the price of corn will be forced to climb higher. In 2010 corn prices jumped by more than 70% following market conditions not too dissimilar from today.

 

 

 

Disclaimer: Please note that while Valbury Capital has made every attempt to ensure the accuracy and reliability of the information provided in this document it can give no warranty of any kind.  The information provided is intended to be of a factual nature only and is not intended to amount to investment advice or to contain any form of investment recommendation.   No person should rely on or use the information provided to form any investment decision