LINNCO FUTURES GROUP

233 S. Wacker Dr., Ste. 2400, Chicago, Illinois

(November 24, 1997) CORN: The November USDA crop report held few surprises as a production estimate 9.359 billion bushels came very close to the average trade guess of 9.348 billion bushels. The USDA has been very consistent with their estimates, as there has been only 1/2 of 1% change in the month-to-month reports. November's rise in production is the largest change this crop year, still only a meager 47-million bushels. The world production estimates have been very consistent with previous reports, leaving the market with only the demand side to focus in on.

(Mil. Acres)	October		November
Planted		 80.2		 80.2
Harvested	 74.0		 74.0
Yield		125.8		126.4

(Mln. Bushels)
Beginning Stocks  884		  884
Production	 9312		 9359
Imports		   10		   10
Total Supply	10206		10253

Feed & Residual	5625		5625
FSI		1775		1775
Domestic Use	7400		7400
Exports		2025		1925
Total Use	9425		9325

Ending Stocks	 781		 928
Stocks/Use	8.3%		10.0%

U.S. PRODUCTION–There were only five states that showed production changes of over 5.6 million bushels, and of those states there was two with decreases. Illinois showed the greatest change, a 22- million bushel decrease (2BPA) and Kentucky an 8.6-million bushel decrease (7 BPA). The three states that posted increases were Minnesota at 19.4 million (3 BPA), Wisconsin at 14.8 million (8 BPA) and Ohio at 13.8 million (4 BPA). Ohio and Wisconsin still have over 42% and the later two states still have over 42% of the crops to be harvested (as of November 9) and may see changes if adverse weather were to materialize. The only debate over the production estimates comes from the first (Iowa) and third (Nebraska) leading producing states as to field loss. The USDA left both states production unchanged from the October estimates, even though both states reported ear droppage to be anywhere between minor and severe due to to corn bore and wind damage. The USDA has accounted for some field loss in this report, but I would expect a total reduction of 25 million for the final as quite reasonable. Any larger reduction offset (small percent) by a reduction in feeding (cattle being run on affected fields). The supply side will be a non-factor until January, when the USDA will release the final estimate. The regional break down was left unchanged in this report, and will still leave the eastern Corn Belt with a stronger basis than the west.

U.S. DEMAND–The only change in demand comes from the export sector, which showed a 100-million bushel decline to 1.925-billion bushels. The reason for the large reduction comes from slow export sales, concerns with Asian rim economies, and increased competition for the world feed grain business. As of October 30 the total corn sales on the books are running at one-third less than last year's weak pace and is only 28% (531-million bushels) of the new projected exports. This is especially disappointing considering that on average we do nearly 50% of our total business before the middle of December. The biggest blame for lost export business comes from the aggressisveness of the Chinese (USDA raised their export projection 55 million) to under sell U.S. prices by $5.00 a ton to garner sales to Asian rim countries. Recently we have seen the European countries selling both feed wheat and corn to South Korea at prices $5.00 a ton cheaper than the already cheap Chinese offers. The world is slowly realizing that the export markets are being covered by cheap offers and want to garner what sales are left for January through June before another wheat harvest comes. There are forecasters that think the final exports could be near last year's pace (1.795 million). I don't believe the exports to be that bleak (unless Asian economies continue to falter), but without an increase in the weekly sales reports, we will see more traders lowering export projections. The feeding rate is a concern, because the projected record use is predicated on profitability. The current feeding margins are very poor and unless the export market for meats improves, margins will remain poor. Increased wheat feeding should be expected during the July forward position due to the large carryout and new supplies. The USDA will be very slow to reduce domestic feeding, and at a minimum will take until the March stocks report to see any changes. The loss in exports and the increase in production has the ending stocks propped up to 928- million bushels (up 147), but it is quite conceivable that the reduced feeding (75 million) and lower exports (125 million) ending stocks could approach 1.2 billion.

WORLD SUPPLY AND DEMAND–The USDA lowered corn production by 1.36 mmt., but raised the coarse grain production by a large 4 mmt. The reduction in corn production came from the former Soviet Union, but the largest increae in coarse grain also came from the same area (barley production). There is speculation that the Chinese crop maybe understated by as much as 2 to 7 mmt., as the reports from the rural provinces do not indicate the large loss predicted by the USDA, and may explain the aggressive selling into the Asian market. This would be a big deal to the markets as there is speculation that the Chinese would re-enter the market to import corn this spring. The USDA did increase the ending stocks of corn by 1.75 mmt. to 65.25 mmt. and coarse grain by 3.2 mmt. to 102.85 mmt. These ending stocks of corn are very close to 1995 levels, which produced record price levels. The difference is the coarse grain stocks are 7 mmt. above 1995. The world ending stocks levels are very tight, but there are two major differences between this year and 1995. The first big difference is the large ending stocks of world wheat, which is projected to be 23 mmt. larger than 1995 and will supply wheat as a feed grain if necessary. The second big difference is the U.S. percentage of world ending stocks, while this this year we will carry over 36%, and coarse grain is 27% versus 15% in 1995. U.S. supplies dicate world prices, and the large U.S. ending stocks will keep prices under control, unless there is a crop disaster in the Southern Hemisphere.

PRICE OUTLOOK–Futures have been trading lower (20 cents) since the recent highs of October 20, and is now testing the former highs (support) of the trade during mid-July to mid-August. This recent break has taken December futures to a 50% retracement of the trade from the October 2 low ($2.55½) and the October 6 high ($2.95). The main seller on this break has been the funds, which at the peak had a net long position of 421 million to a now estimated long of 275 million. Along with the fund liquidation there has been a lack of commercial support, and only below $2.75 have we seen commercial pricing (domestic users) re-enter the market from the buy side. The fundamentals do not provide the market with any bullish input, except the cheaper prices. The market must now be demand led, and the easiest sector to identify with is the exports. This is the most discouraging aspect of the market. The producer continues to be the biggest long and is quite bullish the markets for a demand market or a summer drought. The cash and futures have a large carry into the summer and is giving producers an additional reason to hold grain. The problem with holding cash unsold is that deferred futures may decline to the previous months' levels (March prices go to the December levels, May to the March, and so on). This would leave the producer with this same cash price as now, but with additional cost.

The best approach is to sell cash on price rallies (or basis if bullish) for the time slot that continues to pay you a cash carry (storage and interest). The market is at price levels ($2.75/$2.65) that will provide support, but needs a reason to rally. The market is losing the big fund long (should be completed going into the December deliveries), and will not provide the market with sellers. The market will most likely turn into a narrow rangebound trading affair, while waiting for fresh fundamental news. The best approach is buying futures near key support levels and writing out of the money calls (users should use the same approach). The corn spreads are a non-event and may widen further in the old-crop months, but there is not much risk and provides a way to be involved if something goes wrong. The old crop/new crop is a very dangerous spread, especially if the demand does not show up and the early growing season is good. The large farmer holding of grain will be forced on the market and will cause the July futures to lose to the back months, and may even trade near full carry. The biggest hope for a rally in corn is strength in the soybean complex.

Doug Price

Consensus National Futures and Financial On Line Index

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