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PRUDENTIAL SECURITIES, INC.
One New York, New York, New York
(November 21, 1997) CORN: The corn market was fairly volatile last week, starting off with a 6½-cent rally over the previous Friday's close but was followed by a steady decline through week's end that erased most of Monday's gains. The early support was chiefly due to an oversold corn market that had failed to take out the previous Friday's low of $2.71 per bushel, an important area technically. The weakness stemmed from several factors:
(1) Fund long positions (mostly in December) being rolled and/or liquidated; (2) weakness in wheat and beans; and (3) news that Eastern Europe was selling corn to Pacific Rim customers at levels that were displacing cheap Chinese corn.
BEARISH FEATURES–Lackluster Export Pace: The most recent Weekly Export Inspections report came in at 37.3 million bushels. This figure was well above the average trade expectation, but given the recent slow pace, average expectations were low. Even with inspections of this size, exports still lag the average weekly pace of 38.9 million bushels needed to meet the USDA's goal of 1,925 million bushels for 1997/98. At the current pace, corn exports could fall 66 million bushels short of the USDA's goal, finishing the year at only 1.859 million bushels.
Growing Deliverable Stocks: Deliverable stocks have climbed from a meager 1.0 million bushels in late September to 14.5 million last week. Stocks available for delivery are well above last year's levels, with most supplies in Toledo. The rate of growth is strong and with the large crop that is almost completely harvested we expect to see deliverable stocks continue to rise for at least the next few weeks. The availability of these stocks should keep corn spreads on the defensive. Since the deliverable supplies have begun increasing over the last six weeks, the nearby spread has widened to a 10-cent carrying charge from 8½ cents. Some of this movement is due to harvest pressure, but recall that farmers have not been aggressive sellers this fall.
Technical Support Is Very Close At $2.70.: The December contract has support at $2.70. There has been very solid commercial buying above this level that, so far, has repelled fund selling over the last five to seven sessions. The market consensus is that there are sell stops under $2.70; if triggered, they could spark another round of selling, potentially pushing December corn to the mid-to lower-$2.60s. Friday's rally was technically based, and with 550 million open interest in December prior to first notice day, it is unlikely that this market will be supported this week.
December Corn Prices Near The 50-Day Moving Average: Current prices are near the 50-day moving average of 82.75. This technical indicator is popularly believed to be a trigger point for the funds. Indeed, funds were rioted sellers last week.
Funds Liquidating/Rolling December Long Positions: With first notice day fast approaching on November 28, managed funds have to either roll or liquidate their long positions. Thus far, it looks like they are doing some of both. The fund net long position was thought to have been 340 million bushels at last week's start, with the bulk of it in December; now it is estimated at 310 million. If the $2.70 level fails in December corn, expect to see further fund long liquidation.
BULLISH FEATURES–Tight Supply/Demand Projections: Both the U.S. and the world balance sheets are tight from a historical standpoint. The USDA projects the U.S. stocks-to-use ratio at 10.0% and for the world at 11.1%. Although the most recent revisions in November were bearish, from a longer-term standpoint, these balance sheets leave little room for production error in the upcoming crop year. Subsequently, volatility will likely remain higher than in years when there is a little more breathing room.
SWING FACTORS–Chinese Corn Imports: The USDA projects that China will export 4.0 million tonnes of corn and import 250,000 tonnes in 1997/98. Yet, production is estimated at a very low 105 million tonnes due to the serious drought last summer. With relatively large exports versus a short crop, China could very well intend to circumvent their domestic logistical problems by importing corn into southern points near the grain-consuming region after the export program out of the north winds down. The market currently figures that China has sold about 3.0 million tonnes out of the 4.0 million estimated. If China imports corn, the figure may reach 1.0-1.25 million tonnes, with the United States picking up the lion's share. The last time China exported more than 3.0 million tonnes and imported more than 1.0 million tonnes was in 1986/87.
South African Corn Production: El Nino events have a strong correlation with drought in South African corn-producing regions. Indeed, the new corn season has been so dry that plantings, which normally run from late September through late December, are thought to be only 5%-7% complete. Recent rains have been beneficial to the 1997/98 crop, but more is needed. If the South African crop is diminished this year, then exports will dry up as well. The USDA projects 1997/98 South African exports will total 1.0 million tonnes, but 750,000 tonnes of that could be at risk, depending upon production prospects. If so, the U.S. export program would likely benefit. It is too early to lean either way, but developments over the next 30 days will be very revealing as planting progress and long-term weather forecasts are better known.
PRICE PROJECTIONS–For the short-term, December corn should be able to test and penetrate the $2.70 area. If sell stops appear there (as expected), then December corn could have risk to the lowto mid-$2.60s. Longer term, we view this expected break as a buying opportunity in the March contract. The March contract still has potential to rally to the $3.00 area and could possibly test the contract highs of $3.07 by early January. At this point, we do not see much upside opportunity beyond contract highs in the March contract. After the new year begins, we could see a protracted period of weakening prices as U.S. farmers actively sell the crop they didn't sell at harvest, which would likely result in retracing the gains made between now and the first of the year.
Tom Levis
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