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Corn+Soybean Digest

Old-Crop Strength

Old-crop grain prices have tread water for months. Many traders believe that a market that cannot establish a clear uptrend is a market poised for a setback. I don’t agree. Old-crop corn and soybeans prices will hold steady and trade higher in the next few months.

I read the same bearish news that you do. Let’s walk through the problems.

The big funds want out: CFTC reports show that the big funds have been decreasing their long positions in the market, and their current positions are much smaller than a year ago. The actual effect of large specs on the market is a source of never-ending debate.

I look at this news in a different light; if their positions are already reduced, then their pressure on prices moving forward should be minimal.

Corn exports under 1 billion bushels: They haven’t been that low since Richard Nixon was president. We are heading for an export number one-half of what we did just two years ago. It helps to remind ourselves that last year’s crop was 1.6 billion bushels smaller than a subdued 2011 crop. Our corn carry-in was minimal. Something had to give and that something is, in large part, exports. Soybean exports, by the way, are holding up well.

Ethanol use to fall 500 million bushels: Half a billion bushels is a big number but – big picture now - just 10% of total demand. In fact, the number is surprisingly small given negative margins and the chatter about possible plant closings. Like exports, a small crop and carry-in meant something had to give, and ethanol demand is the other piece. Like exports, crush demand for soybeans is solid.

Feed consumption: Here’s a pleasant surprise – corn feed consumption is currently forecast to decline just 100 million bushels (-2%) from the previous year. This is much improved from early forecasts, despite higher corn costs. 

Talk with corn buyers (and merchandisers who work with corn buyers) and you will know that there are players in the ethanol and feed markets who’ve not secured their needs for the current crop year. Building corn stocks is difficult to do in an inverted market; try convincing your boss of the wisdom of amassing $7 corn when a futures market shows it $1 cheaper just a few months out. It’s a tough sell, and many buyers choose to play chicken with the market, hoping prices turn lower before they are forced to step up and pay a higher price.

A larger South American crop: This is a bearish factor in the market. Now if they could only improve their logistics.

Planted acres and U.S. weather: Bearish and bullish factors with one thing in common; these are 2013 new-crop issues. While the possibility of planting 98-100 million acres speaks to too much corn, and continued dryness in the western Corn Belt has us questioning the crop beyond emergence, these factors ultimately speak to value of next year’s crop, and not old crop values through spring and early summer.

The tables (right) tell a story of the last three decades. Old-crop supplies are tight, with ending stocks projected to be fewer than three weeks’ use in corn and soybeans. And when stocks are this tight, cash prices are stronger in the spring. 

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