Watson was buying corn again last week, switching to a net-long futures position of 17,840 contracts as of Tuesday, October 22.
Commercial traders have also been buying of late, most noticeable in the trends of futures spreads.
However, the increased commercial interest could be tied to fear of more tariffs and trade wars with key US trading partners.
After talking about King Gold the previous week, this past week saw King Corn draw more attention. I’ve talked in the past about what it would take for Watson[i] to get more interested in corn long-term, most notably a change in real market fundamentals[ii]. After the dust had settled on last Friday’s session and the latest CFTC Commitments of Traders report (legacy, futures only[iii]) was released, we saw the expected move to a net-long futures position by noncommercial traders (Watson, funds, speculators, etc.). And while the market looks to be getting more excited, there are some long-term issues that could pour cold water on the situation.
But before we talk about that, let’s look at the structure of corn. Every market has two sides: Commercial and noncommercial. Commercial traders are those actively involved in the underlying cash commodity[iv]. Noncommercial traders are funds, investment traders, speculators, etc., who can look at a number of things other than supply and demand day in and day out.
Let’s start with the noncommercial side of corn. Recall from previous conversations, the long-term trend on the continuous monthly chart for Dec corn turned up at the end of August with the Dec24 issue (ZCZ24) priced at $4.01. This ended the long-term downtrend that began with the bearish spike reversal as May 2022 came to an end with the Dec22 issue priced at $7.1150. The completion of the bullish spike reversal during August 2024 brought to mind a number of rules I talk about frequently:
- My Market Rule #1: Don’t get crossways with the trend.
- Due to Newton’s First Law of Motion applied to Markets: A trending market will stay in that trend until acted upon by an outside force.
- With that outside force usually noncommercial activity.
- My Market Rule #6: Fundamentals win in the end.
Therefore, the situation at the end of August was the corn market had seen a technical turn to an uptrend, indicating we should see Watson become a more interested buyer. Initially this was just in the form of covering the previous net-short futures position. Then we saw funds had moved to a net-long futures position of 36,070 contracts the week of Tuesday, October 8. Watson then spent the next week selling before returning as a buyer this past week, pushing the net-long futures back to 17,840 contracts. The question now becomes will Watson continue to find reason to add to its net-long futures position? Or in other words, do real fundamentals support this move?
What were our fundamental reads showing us at the end of last week?
- The National Corn Index (ICY00) was calculated at $3.85 Friday evening
- Putting available stocks-to-use[v] at 13.2%
- As compared to the end of September $3.93 and 13.1%
- And national average basis at 30.25 cents under December futures
- As compared to the previous 5-year low weekly close for last week of 26.5 cents under December
- Putting available stocks-to-use[v] at 13.2%
Given all this, the cash market could still be viewed as neutral-to-bearish, though nothing to get overly excited about given the 2024 US harvest is in its late stages.
What about futures spreads, then? A look at the weekly close-only chart for the precent of calculated full commercial carry (cfcc) covered, we see clear downtrends across the board for the 2024-2025 futures spreads. This tells us the commercial side is growing more bullish. In fact, the May-July spread (brown line on chart) has been on the bullish side of the 33% cfcc threshold since second weekly close of August. Why? The May-July spread is heavily influenced by the next crop in Brazil, and at that time the country was continuing to see the effects of drought tied to El Nino. It’s possible – possible – this could bring some of the world’s buyers back to the US if Brazil sees reduced corn production with its 2025 crop.
Shorter-term, there has been strong demand from key US trade partners. The latest weekly export sales and shipments update, for the week ending Thursday, October 17, showed Mexico with 7,011,200 mt on the books for 2024-2025 as compared to 5,934,800 mt for the same week a year ago. Similarly, Japan had 1,926,000 mt on the books versus 1,330,100 mt the previous year. Total sales (total shipments plus unshipped sales) for 2024-2025 were reportedly 23,478,100 mt, up 34% from the same week the previous marketing year.
Again, why? One of the candidates for US president is promising more tariffs and trade wars with key trade partners, including Mexico, if elected. This could be prompting increased buying interest in case that candidate wins. For the record, it seems parts of the US ag industry have forgotten what happened when a trade war was declared against the world’s largest soybean buyer. The US has become a secondary player on a world stage dominated by China and Brazil. And don’t forget what my friend Jose Rossato, Jr. said during our Global Landscape of Grain panel discussion at the Barchart Grain Merchandising and Technology Conference in early September. Jose dropped the quote of the Conference when he said, “Brazil’s total grain production is expected to double over the next 11 years”. Given that, now doesn’t seem to be a good time for the US to lose customers. But that’s just my opinion, and as you know, I’m no economist.
We’ll see if this keeps a lid on buying interest from Watson long-term. Time will tell. For now, or at least at the end of last week, buying was coming from both sides of the corn market.
[i] My name for the global algorithm driven investment side of any market.
[ii] For those of you knew to my analysis, real market fundamentals are the cash price, basis, and futures spreads.
[iii] I know most of the industry doesn’t listen, but option traders position themselves for reasons other than being bullish or bearish a market. As one told me a long, long time ago, “If I was bullish or bearish, I’d just buy or sell the $@&% futures”.
[iv] An asterisk here could be the gold market. As I talked about previously, much of the buying in gold of late, despite the market being at all-time highs, is coming from investors hedging investments in other market sectors (e.g. global equities). The threat of increased global chaos tied to the US presidential election is real for the foreseeable future.
[v] A key distinction between this and the “ending stocks-to-use” based on USDA’s imaginary numbers the majority of the industry talks about.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
