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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 8, 1997) CORN: The corn market traded mostly sideways last week, roughly in a range between $2.78 per bushel and $2.85. The week's highs were made early and were followed by consolidation above $2.80, basis March. Support at $2.80 finally yielded on Thursday, and the sell stops that were anticipated below that mark pushed prices toward levels not seen since October 7.
Fundamental features for the week were few and far between. Slack exports contributed to the slow grind lower, as did some fair prospects for rain in South Africa, Argentina and Brazil. Speculation that Japan bought Eastern European corn was a definite negative feature because Japan is the United States' best corn customer–they pay cash for the 15-16 million tonnes they buy. So far this year, Japan has committed to more than 7.0 million tonnes and has already lifted close to 4.0 million tonnes. Technically, the $2.80-$2.79 area was a pivotal area, and funds were both buyers and sellers during the week. However, fund selling that topped more than 45 million bushels late in the week took out the $2.79 area convincingly.
MARCH CORN SEASONALITY–With Thanksgiving behind us and Christmas and New Year's ahead, market activity tends to slow as everyone's focus shifts toward holiday activities. Perhaps as a present to the bulls, March corn tends to rally from December 1 through year's end, gaining an average of 3.2 cents from December 1 to December 31. As unimpressive as that may sound, it is not the whole story. Since 1983, the March contract has made the December low prior to the December high 10 times; in these 10 years, the average gain between December 1 and the December high averaged almost 12 cents. In the five years when the highs were made first, the average loss (assuming long positions are maintained looking for the end-of-year rally) between December 1 and the December highs was just 1 cent. Incidentally, the only time a long March position suffered a loss was in 1996; it was 8 cents.
The lows have debuted first in each of the last four years for an average gain of 18 cents between December 1 and the December high; the average gain for the month was 13 cents. Thus, history suggests that if the low occurs first this year, then it is probably that a long futures position taken on December 1 will make money by the end of the year.
The trick, of course, is to know whether this will be a year in which the month's low precedes the month's high. In the five years when the highs came first (1985, 1987, 1988, 1991 and 1993), the fundamentals were much different than those facing us this year. In each of those five years, the stocks-to-use ratio was larger than the USDA's projection for this season of 10%. In two years (1987 and 1988), carryin supplies were at least 4.0 billion bushels, compared with this year's estimated carryin of about 884 million bushels. In 1993, the harvest saw both record yields of 131.5 bushels per acre and record production of 9,477 million bushels; this year's yield will be fourth-largest as projected by the USDA at 126.4 bushels while production of 9,359 million bushels will be third largest.
The one constant in the 10 years in which the low preceded the high in December was the stocks/use ratio, which was in the teens or lower in seven years. Over the last four years, the ratio averaged 10.9%, which is very much akin to the 1997/98 projection of 10%. In the five years when the December high preceded the low, the average stocks-to-use ratio was 41%, four times greater than current projections. (During those five years, March corn gained 1 cent from December 1 to the December high, but if you missed the high and liquidated the long position on December 31, the average loss was 11 cents.)
Tom Levis
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