As of my last article, in early Mch-10, my recommended sales level for the 2009 corn crop was at 85%, with an average price of $4.40 basis the May-10 futures. Since then these hedges have been rolled to the July-10 contract when July was $.11 over the May-10 futures in early April. I had also advised farmers to remain patient and sell the remaining 15% when July-10 futures reached $4.75.  To date this level has not been hit; therefore 2009 sales remain at 85% at roughly $4.50 basis July-10 futures. 2010 sales remain at 10% at an average price of $4.40 basis the Dec-10 contract, while targets above the market for additional sales have not been hit. At this point, I think it would be a good time to reexamine the fundamental factors which are driving corn prices and to review our marketing plan going forward.

As of my last writing in Mch-10, much of the fundamental news driving corn prices has been neutral to bearish. The 2009 carry out has been raised by roughly 20 mil. bu. to 1.738 bil. bu. as production was cut by 40 mil. bu. while demand has been trimmed by 60 mil. bu. Looking ahead to the 2010 corn crop, prospective planted acres at the end of Mch-10 were estimated at 88.8 mil. up just over 2 mil. acres from last year and in line with the markets expectations.  The USDA’s first yield estimate for the 2010 corn crop is 163.5 bpa, leaving production at a record 13.370 bil. bu. The 2010/11 corn usage was forecast at 13.3 bil. bu. leaving ending stocks up 80 mil. bu. from last year. So far the 2010 corn crop is off the an excellent start. Planting progress as of early May-10 was a record high of 68%, while crop conditions show 76% of the crop is in good to excellent condition as of early June-10. These ratings are the 2nd highest in the past decade. Given the rapid planting progress and good condition to this year’s crop, I sense the market is expecting planted acres to increase another 1 – 2 mil. acres in the USDA report at the end of June-10. The global balance sheet has also had a bearish impact. Since Feb-10, the global corn production estimate has risen nearly 11 mmt to 809 mmt, while ending stocks has risen 13 mmt to 147 mmt. Also contributing to the bearish environment is a surge to the US Dollar index which has recently traded up to 14 month highs. The major bullish factor in the corn market since early Mch-10 has been the emergence of Chinese buying of US corn.  To date China has bought just over 23 mil. bu. of corn from the US for the 2009/10 marketing year, which is their first purchase of corn from the US in just over a decade. While to date the amount hasn’t been enough to cause a structural shift in the US balance sheet, it certainly has provided psychological support.  

So once again we are at the point where we must ask "where do prices go from here?"  My sense is that over the next two to three months there will be three fundamental factors that will drive corn prices for the balance of this year. First and foremost will be the weather. If weather remains non-threatening and the market begins to discount another record yielding corn crop, prices will remain under pressure and spot corn prices could challenge the $3 price level this fall. If drought or extreme heat threaten this year’s crop, corn prices will rally to a level that ensures supplies do not run out. My guess is that unless yields threaten to fall below 150 bpa, the $5.00 level would cap any rally. However, other factors would have to be considered. The second major factor driving corn prices will be the upcoming decision from the EPA who is considering a request from the ethanol industry to raise the level of ethanol blended with unleaded gasoline beyond the current 10% limit. Recall last December, when the EPA postponed their ruling until some time in 2010, pending the results of further tests. Recently USDA officials have called on the EPA to make a decision sooner rather than later. At this point my sense is that a decision will be made by the end of this summer. I also believe the market is anticipating a compromise where the EPA raises the blend level but not all the way to 15%; possibly to the 12% or 13% level. The third important factor is future demand for corn from China. The market awaits to see whether this recent demand was just to carry them over to when their new crop harvest is available or is this the beginning of China becoming a longer term net importer? Weather in China over the next two – three months and its impact on their corn crop will likely determine this.

Given the current crop conditions and weather outlook, my guess is that corn prices will continue to drift sideways to lower. I do believe July-10 corn will hold support above the $3.25 level while Dec-10 corn will hold above the $3.50 level prior to the June 30th acreage and stocks report. To date, farmers have been reluctact sellers of corn, particularly now that 2010 prices are very near or below their cost of production. Beyond the June report and the July 4th weekend, if there is no bullish feature, I believe these support levels are likely to be violated as farmers will begin to sell out of last years crop clearing bin space for new crop harvest. Despite this bearish outlook, I do not believe it is time for farmers to make panic sales. After all, rarely is there a growing season without at least one weather related rally. However, I do believe we should get more aggressive with our offers. For farmers that are 85% sold on 2009 crop, lower your offer to sell your remaining 15% if Sept-10 futures trades up to $4.25. For any hedges you still have in the July-10 contract, if you expect to hold the cash inventory thru the end of June-10, place orders to roll these hedges to Sept-10 at $.11 over the July contract. For farmers that are 10% priced on 2010 corn in the Dec-10 contract at $4.40, place orders to sell another 5% at $3.85, $3.90, $3.95, and $4.15. These offers should remain in place thru the June 30th stocks and acreage report.

  
Chart provided by APEX

If you would like more information about this article, please contact Mark at 1.877.690.7303 or send an email to mark.soderberg@archerfinancials.com.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.