By Todd Hultman
If you want to talk about corn crop estimates this fall -- as many do -- we can go on and on about USDA's estimate of 15.09 billion bushels based on a yield of 174.4 bushels per acre. And we can also point out that this record crop is supposed to result in 2.38 billion bushels of ending stocks in 2016-17 which, if true, would be the highest ending stocks-to-use ratio in 11 years.
Or we can talk about how anecdotal reports are suggesting that USDA's estimates are too high, and the actual corn yield may be closer to 171 bushels, pointing to a slightly lower record crop of 14.8 bb. However, even 14.8 bb is likely to add to ending supplies in 2016-17 and is considered bearish for prices.
But as I've mentioned before, too often these exercises of spending so much time and effort in guessing at answers, which none of us know, become distractions from what's more important -- understanding the concrete clues the market is giving us.
If my suspicions are correct, this appears to be one of those times when corn prices are behaving more bullish than we would normally expect from all this talk of record harvest. Let others argue about yield. If December corn can close and sustain trading above the August high of $3.44 1/4, we may soon be able to say that this summer's three-month downtrend is over.
If that seems a little hard to believe, consider the evidence. First, the notion that the U.S. is going to have a record corn crop in 2016 is not exactly fresh news. The bearish writing was on the wall as early as March 31 when USDA estimated 93.6 million acres of corn plantings, which turned into 94.1 million acres on June 30.
The second bearish blow came in July as wave after wave of rain crossed the Midwest and temperatures turned milder than they had been in June. When USDA's first field-based crop estimate predicted 15.15 bb on Aug. 12, the immediate reaction was bearish, even though December corn finished slightly higher on the day. Corn futures went on to finish the month of August at their lowest spot price in seven years while DTN's National Corn Index dipped to $2.73, which was below the reversal low of $2.81 1/2 seen early in October 2014.
As bearish as market action looked in August, corn has behaved much differently in September. USDA is still looking for a record harvest of 15.09 bb, and there has been no bullish news to point to, but there are concerns that the northern Midwest may be in for a wet fall.
I find it potentially bullish, however, that DTN's National Corn Index has rejected the attempt to trade below its October 2014 low and is now at $2.97. December corn has only traded higher in 12 of the past 36 Septembers and yet, as bearish as all the talk is this year, December corn is up over 20 cents on the month and just 7 cents shy of the August high. The weekly stochastic indicator has also signaled a bullish change in price momentum.
The trend indicator that I respect most is the five-week rule, which I wrote about in August. The last time December corn closed above its five-week high was on April 18, not long after USDA predicted a bearish planting estimate of 93.6 ma. You may recall that prices went from closing above $3.90 to an eventual high of $4.49 on June 17 -- even though it was difficult to find a bullish reason in April.
Similarly, I don't have a good fundamental reason for turning bullish in corn yet, and I don't know what USDA's final yield estimate will be, but I do like it that commercials are currently net-long. A December close clearly above $3.44 1/4 would be a bullish change in the ebb and flow of the price discovery process, which is where the more important news for corn is typically found.
Todd Hultman can be reached at email@example.com
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