Will The Next Market Move Be Up Or Down?

If the corn market turned south tomorrow and did not look back, would your marketing plan manage your price risk? If the market begins a bearish drop, how fast and far would it go? Is this something that could not possibly happen, given the high demand and low supply? Let’s take a look at the future in the futures market.

If you think back to 1993 when flooding washed out Cornbelt cropland, the market receded along with the water. The market was satisfied that it had accurately traded the corn and bean crop, demand had been rationed, and it was time to move on. Are we just about at that point this year?

South Dakota State University economist Alan May says last Thursday’s market downtown was indicative of a market prone to heavy profit taking while at the same time having fundamental factors providing sufficient support to prevent more significant losses. And in last week’s newsletter, he says, “All this means is that it is important to watch this market closely to make sure that you don’t assume that the only direction is higher; rather, utilize those tools that can protect your price in the event of a sudden downturn.”

Is that “sudden downturn” imminent? Darrel Good at the University of Illinois acknowledges in his newsletter there is considerable uncertainty about acreage, yield, and production, but if there is favorable weather for the balance of the growing season, there could still be a respectable crop. If that is the case, Darrel Good says there may be some cracks in the foundation holding up the current record high prices.

1) Large cattle and swine numbers have been eating a lot of corn for the past year, which has been expensive, and has caused many producers to curtail production, and if so, that means corn demand will weaken. Cattle placements into feedlots are declining, the number of cattle on feed is declining, and another upward spike in corn prices would reduce the farrowing rate. If you look at livestock futures, the market is anticipating reduced numbers later this year.
2) Corn export shipments have slowed. While we have sold nearly 2 billion bushels into the export market, to get to USDA’s 2.5 billion bushel forecast would require a rate of export sales above what has been happening in recent weeks.
3) Have you noticed the recent headlines about plans being scrapped for new Midwestern ethanol plants? An ethanol slowdown extends from those cancellations to also include slower work on plants under construction and closure of plants currently operating. Those actions signal a loss of profitability in the ethanol production industry, despite a recent increase in spot ethanol prices in the past weeks.

If those planets are lining up, along with an estimate of potential supply such as USDA’s June 30th Planted Acreage Report, the market could be ripe for a correction, and it is impossible to predict how far and fast it may retreat. That is the end of a fiscal quarter and hedge fund managers like to show profits at the end of the quarter.

That does not bode well for the producer, many of whom have gaps in their fields, or maybe even no fields or farms left because of the flooding. However, the management of risk is incumbent upon everyone in agriculture today, and preparing for a market downturn is smart marketing.

Summary:
A slowdown in ethanol production, a decline in livestock feed demand, and slower exports all point to the fact that current high prices may have accomplished their goal of rationing demand. With next week’s USDA forecast of acreage, the supply can be projected, and with those elements, the market may be poised for a downward correction. Smart risk managers will have their marketing plans in place for adequate price protection.