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Why market corrections are healthy – including the corn market

Rick Gershon/Getty Images Standing corn in winter with snow on the ground
A market correction in corn is inevitable at some point, and in some ways necessary.

After we traded mostly sideways for the month of December, corn moved up over a dollar. The USDA January crop report revised the 2020 corn yield lower from 3.8 bpa to 172 bpa.  That took production down 325 million bushels, to 14.182 billion. It also sent corn up the limit on January 12th

When the market makes a quick move up like it did recently, they can get over heated.  Markets don’t move in straight lines. 

Why it happens

There are several reasons for corrections. The market either runs out of buyers as it makes a new high as well as those long the market begin to take profits, thus exiting the market. You also have fresh sellers coming in, believing the market has peaked. All of this is healthy in an uptrend.

It is sort of building a tall tower; If you go too fast before reinforcing the foundations on the way up, it will be too flimsy and can quickly come crashing down. 

As we move higher, the former resistance price levels now become support. The gap left on January 12th at $5.19 is the next support level. 

We would like to see that hold, but even if it doesn’t, it won’t necessarily mean the bottom is going to fall out of the market. Corn could drop at least another 20 cents or more before doing major chart damage. 

Six corrections since August

With the benefit of hindsight, you can look back to the month of August and count nearly six corrections, most of which were minor in nature. Of course, the question now is whether or not this is simply correction number seven as we continue to grind higher.  Nobody knows the answer to this question. But there are reasons to still be bullish long term.

Attention will soon turn toward planted acres. We expect there to be a pretty strong battle between corn and soybean acres. The acre shifts between corn and soybeans will likely be regional. Many Midwest farmers may already have crop rotation plans set, but southern farmers often make last minute changes based on profit outlook.

How will it all shake out? Talking to my seed salesman in Iowa, they are selling a lot more soybeans than last year. This makes sense as many farmers have been pushing corn-on-corn acreage for quite a while, as it had a slight financial benefit over planting soybeans --at least in my neck of the woods. 

The lack of rotation was very evident this past season as corn-on-corn produced at least 20 bpa less than corn-on-beans for those affected by the drought. 

From what our customers in Missouri tell us, they have their rotation plan and they tend to stick with it. It is the opposite for our customers in Arkansas who tend to want to chase the market, planting whatever will give them the best profit.

Drought lingers

It is also worth mentioning that drought affects are still lingering. Those soil moisture levels have had no recharge. We have La Nina like conditions here just like in South America. It will have to rain a lot in the spring just to get us back to normal. 

Corn’s global situation

The reality is that Brazil and the Ukraine are sold out. Brazil first crop corn has taken a hit from dry weather and is already committed to domestic needs. China is expected to keep buying corn as it builds back its sow herd.

Where does that leave the U.S.?

Not only do we still have the world’s corn, it is some of the cheapest on the planet.  China is still a long way from making good on their Phase I agreement, so it makes sense that they begin here. 

Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. 
The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 
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