Corn market breaks $3, could fall more

Analysis by Sam Nelson

U. S. corn prices fell through the key support level of US$3 per bushel on Dec. 5 for the first time in more than two years, signalling a further weakening could be in store as the contracting global economy hurts demand.

The ethanol industry is being tested financially, with crude oil futures slumping more than $100 a barrel from their July record above $147 a barrel (all figures US$), while the world is awash with wheat that is competing with corn as a feed grain.

U. S. corn exports have slumped amid the competition from wheat, and a top official from the U. S. Agriculture Department said American farmers could plant close to 90 million acres with the grain next year, versus 85.9 million this year.

“Overall, the corn market doesn’t have a bottom until the economy starts to improve,” Citigroup analyst Terry Reilly said. But, he added, “there are some people who think corn is cheap below $3, and I think there would be some commercial buying.”

U. S. corn futures have plunged more than 60 per cent since hitting a record high of $7.65 per bushel in late June. The slump was in line with the rapid deterioration of the stock market and crude oil.

Chicago Board of Trade (CBOT) corn futures prices for spot delivery December plunged below $3 per bushel on Dec. 5 for the first time in more than two years.

“I don’t want to talk about December, because it soon will be in delivery, but the downward objective in March is $2.78 based on long-term technical charts,” said Charlie Sernatinger, an analyst for Fortis Clearing Americas.

“This is a capitulation of about anyone long corn,” Sernatinger said, referring to the collapse of corn prices on Dec. 5, which fell more than seven per cent.

“It’s very important for March to hold above $3.08-1/2 on nearby charts and, if it breaks below that, there’s no support until around $2.50 to $2.60, which is the area that we went through on the way up in the fall of 2006,” said Bryce Knorr, senior editor for Farm Futures magazine.

Loan rate as floor?

If the March contract does fall below $3, and then breaks below $2.78, it would be difficult to pick a bottom for the market, Sernatinger said.

“The loan rate for corn next year is $2.04, so that could be the bottom for the cash market,” he said, referring to a government price support program.

No one has paid much attention to the U. S. Department of Agriculture’s farm program, including the loan rates for commodities, over the past couple of years because grain and soybean prices have remained at historically high levels, hitting record highs this year.

When prices are above the loan rates, farmers sell their corn to grain elevators, processors or ethanol plants. When the price falls to the loan rate or below, farmers can store the corn and obtain a low-interest loan from the government.

“We’ve seen a real rout in corn, and I think a lot of it is because some brokerages are talking about crude going to $25 a barrel, but they were the same brokerages that said it was going to $200,” Knorr said.

And markets keep falling as the United States government haggles with the U. S. auto industry about a bailout plan to keep them from going bankrupt, which might further hammer equity and commodity prices.

Further bearish weight on corn has been stemming from the plentiful U. S. supplies this year at just over 1.6 billion bushels, or 300 million more than last year, and forecasts for a “comfortable” supply of just over one billion bushels next year, according to the USDA.

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