Corn Comments

Trading the grains the last two months has been akin to "Ted and Bill's Excellent Adventure". We have seen hedge funds pour money into the corn and bean markets in spite of the fact that we are dealing with record crops heading into the end of harvest season. The speed at which they have switched sides in these markets, going from big NET shorts to big NET longs has been breathtaking. The end result has been that speculative buying has caused farmers to become stubbornly bullish refusing to let go of their freshly harvested crops as they look for even higher prices.

The move higher was led by the meal, which dragged the beans higher and that in turn pulled corn higher. Of course, it does not hurt the bullish cause when China comes in and gorges on US beans. Grain traders are essentially watching to see when they will start cancelling US bean orders and move to sourcing elsewhere.

In the interim, hot money flows have forced a substantial amount of short covering as there was simply not enough commercially-related hedge pressure to absorb the buying from panicked shorts and bottom-picking bulls. Throw on top of that the usual index fund buying and you can see the result - corn prices have come well off of their late September lows.

The question now becomes - what next? Farmers have been holding back newly harvested grain in those nice shiny new grain silos that they were able to afford when corn prices were above $7.00 and bean prices were in the teens. that has keep the price relatively supported. But while US farmers are the best in the world when growing food they are oftentimes rather poor when it comes to marketing (pricing) it. No matter how one measures it, there is a HUGE amount of grain out there in the nation at this time. Farmers seem to forget this.

They get bulled up at precisely the wrong time and depressed at the wrong time. It is human nature and good business sense to want to obtain the highest price possible for one's goods - the problem occurs when farmers start thinking like speculators instead of business men. Specs take on risk in the hope of making gains - sound business policy involved AVOIDING or MINIMIZING risk as much as possible.

Farmers who are watching prices at the Board working higher and thinking: "I am not selling anything as prices are going higher" are essentially gambling with their farm's income. It makes sense, considering the soaring US Dollar (which is making US corn extremely expensive compared to corn from other source nations ) and the fact of the massive harvest and the fact that this rally has been primarily driven by short-covering (see below) to start taking advantage of this rally to price some of that newly harvested grain.

If a farmer is inclined to try holding out for even better prices, they are betting that weather problems are going to hit S. America or some other extraneous event (like the binge buying related to a modest Chinese interest rate reduction) will provide even better prices at which they can sell later on, but what if none of that happens? What guarantee do they have that weather will not be benign in the southern hemisphere? They are essentially rolling the dice and hoping and that is not a sound risk management plan. It is one thing to hold off some grain for "gambling stocks" but an altogether completely different ( and foolish in my view) thing to not price any grain at all.

That being said, take a look at the chart and notice the move off of the lows. This shows closing prices only so it does not reflect the fact that the front month contract touched $3.89 last week.

Now look at the Commitment of Traders report through this Tuesday where I have broken out the large speculative component and charted their long and short positions.

I have posted this chart up previously but wish to do so once more to make a point - notice that the number of long positions in this category have not varied by a substantial amount since late July/early August.

But look at the red line showing the short positions and note how incredibly volatile it has been. Shooting sharply higher as prices fell and then dropping off equally sharply as prices rose. What this tells us is that it is large spec activity that has been behind the move lower in corn since May of this year and the move higher in corn since October. A goodly portion of the short positions they put on over a 5 month period since late May, have now been taken right back off since October.

The question that should be asked by any farmer is simple - once these big specs are finished covering shorts ( buying back those short positions and closing them out) just who is it that is going to pay these kinds of prices for corn given the massive size of the crop out there?

Today might have been a sign that this short covering has run its course - it is hard to say given the horrific volatility in these markets of late - given the sharp drop heading into the closing minute of trade today. If it is, and again, it is not yet clear, farmers who failed to price any grain during this recent rally are going to end up kicking themselves for not doing so especially considering the amount of revenue that they might have passed up by not pricing any of their grain.

We might have to wait until after the first of the new year before we really see some heavier grain movement off of the farms, as there might be some farmers holding off selling for tax reasons. That being said, there is no guarantee of this rally lasting that long, especially with the US Dollar hitting a 51 month high today.

US corn, driven higher in price by speculative short covering, and a soaring US Dollar, are not the ingredients that go into the recipe for making US origin corn cost competitive on the global market.