Tuesday, November 15, 2011

Bullish News for Corn Futures Heading into 2012

The bumper US corn crop of 2011 has turned into a disappointment, leaving global corn stockpiles at a three-year low.  Courtesy of Bloomberg via The Daily Crux:
The U.S. is reaping its smallest corn harvest in three years after a drought damaged what was a record crop as recently as July, driving annual prices to an all-time high and curbing an expansion in global food supplies.

The government will forecast production of 314.7 million metric tons tomorrow, 27.4 million tons less than four months ago, the average estimate of 30 analysts surveyed by Bloomberg showed. The cut is equal to output in Argentina, the second-biggest exporter. The U.S. Department of Agriculture already expected a third annual drop in global corn stockpiles and the first in soybean inventories in three years, offset by an expansion in wheat reserves to the largest in a decade.

Corn, used mostly to make livestock feed and ethanol, is the only one of eight members of the Standard & Poor's GSCI Agriculture Index to gain this year.
Corn prices tanked in September, but have since stabilized on these supply concerns:

corn futures chart november 2011
Corn futures have recovered from a rough September, as support again held around the 580 mark. (Source: Barchart.com)

The futures markets are pricing in a modest increase in corn prices through next July (remember the old saying that corn always rallies by July 4th if it's going to rally at all).  But check out the lack of action at the long end of the futures curve!

corn long dated futures prices

Source: Barchart.com

2014 corn is a very interesting call option on Chinese consumption.  There have been reports that the Chinese are quite concerned about the availability of corn over the next five years (see: Corn Supply an Ongoing Concern for China).

We'll keep an eye on the corn market moving forward.  Futures are not a buy-and-hold asset class, especially the grains - I prefer to look for breakouts to the upside, especially those with favorable supply/demand setups (as we have here).

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