Market Commentary for June 14, 2019

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

I've only been following the commodity markets since 2012. That was the year of the drought, which broke the night before my first daughter was born (about 5 weeks early). That fall and following we saw corn futures prices in the $8 range. And prices remained above $5 beyond the next season from what I remember. In the last couple years we have sort of seen a stagnant sideways movement in corn roughly in the $3 -$4 range. There has been a lot of talk about being 'overdue' for another drought to push prices back up to more profitable levels. It does not look like that is going to be the case this year. However, those of us newer to these markets are learning that cool and wet springs could impact planting enough to have similar supply reductions as we saw in 2012 which could trigger prices at levels we have not seen in a few years.

Technical Analysis 




From a technical perspective looking back at the last couple of weeks we have seen the RSI reach overbought levels and a bullish crossover in the MACD. As of the last market close the RSI was over 70 and after some convergence in the MACD it looks like it remains bullish. And prices are well above the 20,50, and 90 day moving averages. Not shown is the volume, but it has been tracking right along with the rise in prices. Technically this market is hot and may get hotter.

Fundamental Analysis

While technical signals might give an overbought signal on a short term basis, the fundamentals could support strengthening at lease over the mid term through the harvest season as we learn just how much of the late planting will turn into a crop that faces heat stress during the summer and delayed harvesting issues in the fall. In the latest USDA WASDE report total harvested acres and national average yield was reduced. Recently some analysts have even entertained the notion of $10 corn. Really? I thought. So I plugged the latest numbers into my balance sheet and my very crude model for December corn futures to see what I would get.

(abridged USDA June WASDE numbers)

	June WASDE	Bullish Projections
Supply:
Planted Acreage (million acres)	90	86
Harvested Acreage	82	75
Yield (Bushels/Acre)	166	166
Beginning Stocks (million bushels)	2,195	2,195
Total Production	13,670	12,450
Imports	35	35
Total Supply	15,900	14,680
Total Consumption	14,250	14,250
Ending Stocks (million bushels)	1,650	430
Stocks to Use	11.58%	3.02%
Model Projected Price:	$4.23	$11.32

My model is based on some of the work by Scott Irwin and Darrell Good at U of I, but very loosely. I only used about 5 years of data and did not have the correction factors for weak or strong demand. But at least for the last year it has served as a good barometer at least directionally for corn prices. Based on the current WASDE numbers its a bit short of where December futures closed ($4.63). But if we plug in the very bullish harvested acres numbers that are being thrown around $10 corn definitely looks like at least an upper bound based on my model. The market is somewhere between my model's projections going off of the WASDE numbers and something a bit more bullish.

We always hear about late planting and how its going to hurt yields, and how a hot or dry streak through the summer is going to hurt pollination etc. and modern genetics seem to fool us by the time we get the final numbers on national yield (at least for the short time I have been following the market). But this year might really be different.

References:

Irwin, S. and D. Good. "New Corn and Soybean Pricing Models and World Stocks-to-Use Ratios." farmdoc daily (6):99, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 25, 2016. Link: https://farmdocdaily.illinois.edu/2016/05/new-corn-and-soybean-pricing-models.html

Is $10 Corn a Possibility??? The Van Trump Report. June 13, 2019. https://www.vantrumpreport.com/why-i-remain-bullish-corn/?loggedout=true

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Market Commentary for December Futures (October 12, 2018)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Previously my fundamental analysis and model price projection was at least tracking well with December futures, with some differences most likely due to the simple model and inability to account for uncertainty around trade policy.

(September Model Projections)

(October Model Projections-Update)

But after this last WASDE report my model is showing greater divergence. Things not accounted for in the model in the last few weeks include marginal improvements in trade talk, possibilities of expanded year round ethanol, and wet weather impacts delaying harvest. There are also a few word of mouth reports out there that some farmers aren't seeing the yields quite expected. Technically, by the close of trade on Friday there were some promising signals. Since my last update we've seen positive crossover in the MACD and continuing momentum there, as well as a closing price at the end of the week of 3.73 above the 20, 50, and 90 day moving averages. The close on the preceding day which was report day (October 11) at 3.69 was above both the 20 and 50 day moving average. We will have to see if this momentum continues through the week next week although the RSI is sitting over 60 indicating corn could be a bit overbought.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Market Commentary for December Corn Futures (9/24/18)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Fundamental Analysis

Tracking the last three WASDE reports I have taken a look at my previous model projections and the impact on December corn futures below. While there is definitely a gap (I'm persistently higher than the futures price in my projections) between my model projections and actual December futures prices around the report date, the directional trends are not far off. I would explain a large part of the difference by poor model fit to my simple model having omitted lots of fundamental variables and effects as well as any impact that the tariffs may be having on soybeans pulling down corn.

Technical Analysis

Technically, it is an understatement to say that the September 12 report was a bad day for corn markets. The increase in national average yield to 181.3 bushels per acre brought prices down. The RSI and the MACD reflecting the downward momentum.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

The Future of Ag with Bayer

"We can do over a billion simulations of crop genomes to determine the best phenotype in silica, in the computer, before we ever put a single seed in the ground," says Stern. "That gives us more opportunities to test and learn through machine learning, it saves as we're putting the seeds in the ground until later and we actually have more insight."

From:
Bayer Executives Unfurl Industry Giant's Goals For Ag

http://ccms.farmjournal.com/article/news-article/bayer-executives-unfurl-industry-giants-goals-ag

(Via AgWeb)

Market Commentary for December Corn Futures (6JUL18)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

As of Friday most analysts are proclaiming the start of a trade war. The market's reaction was not that dramatic, and we know with regard to corn, China is not a huge player when it comes to our exports and a lot of trade expectations are likely baked in at this point. Or are they?

When we look at corn we see a continuing decline in the daily chart...although not as steep as we have seen before.

In my last post I discussed the planted acres report and price scenarios (based on my simple model) assuming USDA's projected yield of 174 acres and the slight increase in acres. And I wondered how much trade worries could explain any of the impact on prices. Given China's minimal role in exports (not to reject spillover effects from other markets) if I take my basic model and project prices based on a number of potential yield scenarios it starts to look like what we are seeing on the board and in the charts could largely be explained by big yield expectations.

Yield Stocks to Use Model Projected Price

174                 11.99% 4.14

176                 13.11% 3.94

178                 14.23% 3.76

180                 15.35% 3.61

*Corn Price = a + b (1/Stocks-Use Ratio)

Informa economics reported an expected yield estimate around 176 bushels recently. Other analysts could be making a higher guess. We did see some daytime heat and warm nighttime temps this last week as a record portion of the corn crop is silking at this time. One thing that always surprises us is how robust modern genetics and varieties enable corn to pull through almost contrary to what crop ratings say. Recall last year based on conditions, ratings, and other factors analysts were for a long time thinking about 168 bushel yields and we ended up at 177. All of these factors make a December corn price near or above $4.00 seem like a stretch at this point based on a simple model with yields anywhere north of 176.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Tariffs and Market Response for CZ2018 Futures

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Take a look at the CZ2018 futures contract for the last few weeks and you'll feel you stomach drop.

WASDE June 12 / Planted Acres Report June 29 (summary)

Supply:
Planted Acreage (million acres):  88/89.1
Harvested Acreage: 80.7/81.7
Yield (Bushels/Acre): 174/174

Ending Stocks (million bushels): 1,577/1753
Ending Stocks/Total Consumption (%): 10.79%/11.99%

*Model Projected Prices: $4.41/$4.14

*Corn Price = a + b (1/Stocks-Use Ratio)

On Friday June 29 USDA released its planted acres report and increased planted and harvested acres. According to the updated balance sheets, that could have been slightly bearish (see below). This makes you ask a couple questions. 1) how much of this was already priced in and already reflected on the chart 2) how much of the price drop we have seen is due to trade and tariffs?

This is an ongoing question. It looks like whatever the impact, we're beginning to see sideways trading until something major in terms of weather upsets the above normal crop conditions ratings. How exceptional does this have to be to push back against the price headwinds we are getting from talk about tariffs? That is a hard question. Sonny Perdue and folks at USDA are working on it according to this story:

 "Our economists are using formulas and algorithms to determine the elasticity of what that trade disruption is, versus [other] market factors" - Sonny Perdue

from: https://www.morningstar.com/news/dow-jones/TDJNDN_201806269373/grain-highlights-top-stories-of-the-day.print.html 

That would be good to know from a marketing standpoint (how much can we expect weather to impact price vs. a change in the policy environment and how do we hedge against that) and a need to know if they are going to develop a scheme to compensate financial and economic losers in what many think to be an impending trade war. It is just perplexing to me that we are talking about completely changing the market environment for our food supply...including tariffs and to 'correct' those distortions with possible payments, supports, purchases etc. by government. While far from being a truly 'free' market to begin with, this seems like a clumsy step backwards.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Market Analysis June 15, 2018 (Dec 18 Corn)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

A few weeks ago I was looking at the decline in December corn futures and attributed some of the drop to scares related to potential tradewars. Trade wars aside, when you look at the balance sheet after the latest WASDE report nothing substantial changed:

WASDE Estimates for May/June

Supply:
Planted Acreage (million acres):  88/88
Harvested Acreage: 81/81
Yield (Bushels/Acre): 174/174
Beginning Stocks (million bushels):  2,182/2,182
Total Production: 14,040/14,040
Imports: 50/50
Total Supply: 16,272/16,272

Consumption:
Feed and Residual (million bushels):  5,375/5,350
Other Food, Seed, and Industrial: 7,115/7,165
Exports: 2,100/2,100
Total Consumption 14,590/14,615


Ending Stocks (million bushels): 1,682/1,577
Ending Stocks/Total Consumption (%): 11.53%/10.79%

Model Projected Prices: $4.24/$4.41

Using data pulled from past USDA reports and historical December futures prices I developed a model similar to Darrel Good and Scott Irwin predicting price as a function of stocks-to-use ratios:

price = a + b (1/Stocks-Use Ratio)

What we can see from these projections are that the changes in the balance sheet from the May to June WASDE are minimal, and if anything could be trivially bullish with an increase in the projected price. With announcements this week of tariffs by the Trump administration the specter of trade wars at least for the near term is continuing to weigh the markets.

In addition to any loss in demand related to trade, many traders (the funds?) could be also thinking about the compound impact of trade wars in addition to better than expected yields. While I would tend to discount the really great crop ratings reports that have been coming out in the last couple of weeks (because they are so early) you can't discount how resilient modern genetics have been and allowed those 'better than expected' yields the last couple years despite some expectations of yield impacts from stress. 

Ignoring any impact of trade wars on the demand side, it is easy to see what could happen to ending stocks to use and price as the yields tick up. If we were to beat last year's record yields you can really see the price pressure.

Yield Stocks to Use Price

174                  10.8% 4.41

176                  11.91%        4.16

178                  13.01%  3.95

180                  14.12% 3.78

On the technical side, this is playing out on the charts with price falling below the 200 day moving average (blue) for a number of sessions and the 20 day (red) dropping below the 50 day (black) and lots of volume behind this momentum. The MACD mirrors this with no hint of reversing.

What happens next will ultimately depend on how trade issues unfold and how the summer weather impacts pollination and grain fill. One thing to nail down will be actual planted acres to come out at the end of June. It seems like the worst of the trade issues are being priced in now, so as long as planted acres don't surprise us with unexpected increases perhaps a weather issue or trade resolution will create some price bounces as we go through the summer.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****