Big buildup in corn stocks seen overwhelming prices

Active harvesting of a record-large U.S. corn crop likely will keep a lid on Chicago Board of Trade corn futures prices well into next year despite improving demand for the world’s chief feed grain due to the current lower price level, analysts said.

Bellwether CBOT December corn, the first contract reflecting the newly harvested crop, had already plunged over $2 per bushel or over 35 per cent the past year to a three-year low of $4.32 per bushel last week.

During the same time frame, U.S. corn production prospects have jumped nearly 30 per cent from last year’s drought-reduced crop leading to an expected supply buildup from a 17-year low this year to an eight-year high next year.

“I am looking at building world inventories and weaker prices into the next 18 months,” said Roy Huckabay, analyst for The Linn Group, a Chicago trade house. “I see a huge U.S. corn crop that can easily be 14.1 billion to 14.3 billion bushels so there is not much rally potential,” Huckabay said.

The U.S. Department of Agriculture’s latest forecast for U.S. corn production is a record 13.843 billion bushels, above the previous record 13.1 billion set four years ago.

The huge crop is being harvested later than usual due to the record-late planting season and late-maturing crop.

“Seasonal trends in years with late harvest show a tendency for corn to make a new lower low into December delivery. First downside objective is $4.26, but that may not hold if the crop really is 13.8 billion bushels,” said Bryce Knorr, senior editor for Farm Futures Magazine, referring to the Dec. corn contract delivery period that runs the first two weeks of December.

But output may exceed the 13.8-billion-bushel level since yield reports from the autumn harvest have been above expectations, according to analysts, agronomists and other cash grain sources.

“I am looking at eventual lows in corn of $3.50 to $3.80 but suspect that will happen well into next year, maybe in March. The crop is just too big and the export demand is not so good once you get past China,” Huckabay said.

China purchases

The lower corn prices have increased the demand for U.S. corn with China recently buying significant volumes — reportedly over a million tonnes of U.S. corn in October. But analysts are skeptical enough fresh demand will surface to counter the price-depressing buildup of corn supplies.

Additionally, demand for corn to process into ethanol is seen levelling off in the coming year as oil companies are hitting up against the current “blendwall” — the upper amount of ethanol it can blend into the U.S. fuel supply. Today, about 40 per cent of the U.S. corn crop is used to produce about 13 billion gallons of the renewable fuel.

“The big supply is still trumping big demand. I’d be surprised if we break out of the $4.20 to $4.80 range any time soon,” said Jeff Thompson, analyst for ED&F Man Capital.

There are several factors that may keep corn prices from falling much further than current levels and also allow for the potential for at least a modest rebound of prices.

“I have felt this fall that the $4.20 level would hold the corn market,” said Arlan Suderman, analyst for Water Street Advisory.

Suderman said there are several technical layers of long-term support that cross near or just above the $4.20 level “most important of which is trend line support that has held the market since 2005.”

Hedge fund traders already had sold the corn market heavily short through the summer and early autumn when it became evident U.S. farmers were likely poised to produce a record crop.

“I believe speculative fund managers, who are believed to be holding large short positions, are reluctant to add to those positions so close to such significant support,” Suderman said.

However, Suderman cautioned that if the key $4.20 support level was broken the market could possibly fall below $4 to the $3.75 to $3.80 area.

“Such a flush would likely be short lived, with end-users seeing it as a tremendous opportunity to extend coverage; both domestically and globally,” he said.

Also, farmer selling would nearly dry up at the lower price levels, leading to a likely rebound of prices.

“Farmers have little incentive to sell at these prices or lower, at least not until they begin to run out of money, which could be a while,” Suderman said.

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