Hungry China, Fewer Plantings And Drought Fuel Corn's Inexorable Rally

Frenetic Chinese buying, a dire shortage in plantings and drought from the United States to Brazil and Argentina are fueling an eighth straight bull month in corn prices, which is likely to extend the near eight-year highs hit last week.

Corn’s front-month futures contract on the Chicago Mercantile Exchange shot to $5.95 per bushel on Friday, its highest since an $8 peak attained in July 2013. 

Corn futures, a yardstick for global price direction and often reflective of domestic US issues, have hit multi-year highs lately on strong Chinese buying, mounting expectations around the size of the US export slate this year and the potential for a smaller-than-expected planted area next year, the Agricensus industry portal said last week.

And there seems little to stop the bull run that started in CME corn in August of last year, when the commodity began rising from lows of $3.07 per bushel, in response to planting and harvest shortages caused by the coronavirus pandemic.

Corn Above $6 On The Horizon Next/h2

CME corn technicals tracked by Investing.com indicate potential highs of $6.07 and above if the market stays the course driven by blistering demand from China—the number one consumer of the grain—and continuous concerns over the status of the US and South American crop.

Said Jack Scoville, who heads agricultural research for Price Futures Group in Chicago:

“Chinese demand has been strong … and it looks like they need the corn. Prices inside China for corn remain extremely high.” 

“On the weather front, it is drier in central and parts of northern Brazil. Southern Brazil is also dry. Argentina is dry again and corn in Argentina is losing yield to dry conditions and crop stress. Progress of the US winter corn crop is well behind normal.” 

Drought is already a factor in some parts of the key US growing regions, but data is increasingly highlighting that the record yield the USDA is modeling its 2021/22 outlook around is unlikely to be reached, unless there is a significant change in the weather, teeing up further volatility ahead.

Drought Drains Output Potential In Corn/h2

Diana Klemme, vice-president at Grain Service Corp, told Agricensus on Monday that “the drought is real”—in terms of its threat to the US crop. Data from the United States Drought Monitor for Apr. 6 showed states across the west of the country already in a state of extreme or exceptional dryness.

Key corn producing states in the US Midwest and up to the border with Canada are also listed as abnormally dry or in moderate drought across much of their productive regions as well, leading Klemme to question the capacity for US farmers to plant.

Klemme noted:

“It’s hard to gauge why farmers are doing what they're doing. Iowa/Nebraska corn acres don’t seem to show any pullback. North Dakota acres are down, but South Dakota acres are up,” 

“North Dakota/South Dakota bean acres are mixed so it’s hard to sort out the impact of higher prices versus drought versus recovery from last year’s lost acres due to Prevented Planting.”

Ethanol, Livestock Demand Exacerbate Corn’s Short-Supply/h2

US corn supplies will shrink by more than previously forecast due to rising demand from the ethanol, livestock feed and export sectors, the US Agriculture Department said on Friday.

Corn’s price prospects got a major boost last week after the US Department of Agriculture forecast the domestic corn stockpile will fall to 1.352 billion bushels by Sept. 1, from 1.919 billion in September 2020. It would be markedly lower as well from the USDA’s March ending stocks outlook of 1.502 billion bushels.

China's agriculture ministry also significantly raised its forecast for 2020/21 corn imports on Friday, reflecting actual market demand for the grain due to a spike in the crop's domestic prices during the year.

Said Tobin Gorey, director of agricultural strategy, Commonwealth Bank of Australia, in a comment carried by Reuters:

"China's official estimates of corn imports were revised up by a whopping 12 million tonnes.”

“An upward revision is not all that surprising. The scale though was surprising."

China is expected to import 22 million tonnes of corn in 2020/21 year, the Ministry of Agriculture and Rural Affairs said, more than doubling its forecast from 10 million tonnes announced last month.

Large speculators, meanwhile, cut their net long position in Chicago-traded corn futures in the week to Apr. 6, ahead of the release of the USDA crop report and Chinese import report, regulatory data released on Friday showed.

The Commodity Futures Trading Commission's weekly commitments of traders report indicated that non-commercial traders, a category that includes hedge funds, could ramp up their buying this week after seeing the outwardly bullish US plantings update and Sino demand numbers.

Busy Year For Corn Exports/h2

Agricensus noted that US corn was already on course to record its busiest ever year of exports before the USDA raised its outlook last week for the marketing year to 68 million metric tons. Trade sources expect the figure to surpass 70 million metric tons and potentially reach as high as 72 million.

The boost in the USDA’s export forecast is only likely to further tighten ending stocks and drive prices higher in a move that typically encourages farmers to dedicate more area to planting. But with both corn and soybeans recording high prices, farmers are unlikely to take land away from either staple as their planting efforts get underway, capping the planting outlooks for both crops.

Against that, with the USDA calling for 91.1 million acres to be planted with corn in 2021/22—well below the 93.1 million acres that analysts had expected—the agency is already relying on a record yield figure to boost production to 15.15 billion bushels, or 385 million million tons.

Drought conditions are likely to undercut that yield outlook and make it even harder to plant and produce such a massive crop.

Said Klemme of Grain Service Corp:

“Water demands for beans are not as big, but drought can affect any crop... We have a lot of market volatility ahead for sure.”

Technicals Rank CME Corn 'Strong Buy'/h2

In terms of technicals, front-month CME corn is ranked as a “Strong Buy” on Investing.com’s Daily Technical Outlook.

If the market retains its upside, then first resistance is expected at $5.8784, second at $5.9567 and third at $6.0684.

In the event of a retreat, first support is forecast at $5.6884, second at $5.5767 and third at $5.4984.

In any case, the pivot point between the two is $5.7667.

As with all technical projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Written By: Investing.com