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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 20, 1997) CORN: SHORT-TERM KEY FACTORS–Harvest Progress And Weather: As of last week, the USDA estimated the 1997/98 corn harvest as 27% complete versus 24% on average. The corn crop is progressing a little ahead of normal, and we think that harvest progress should reach the halfway mark on Monday's report. Additionally, the short-term weather forecast looks decent for harvest progress this week, and solid gains are expected for next week's report, possibly topping 70% completion.
Farmer Selling: So far, farmers have not been heavy sellers of corn yet because their focus has been on soybean harvest, and corn harvest is not quite one-third complete. Many trade participants feel that the farmer is going to wait for $3.00 per bushel cash corn prices, with last year's high prices fresh on their minds. The other school of thought (to which we subscribe) is that the U.S. farmer is sitting on potentially the second largest crop on record and will sell the crop at these very high harvest prices. Although recent price advances have certainly caused farmers to be more bullish, it is possible that heavy corn marketings may not take place until the new tax year. If demand requires that the cash market offer enough incentive to move corn out of farmer hands, elevators and end-users may be able to take ownership of corn this fall through the use of deferred pricing contracts.
Fund Buying: We estimate that managed futures funds are now net long 360 million bushels of corn. Although this is a large net long position, it is not even close to the net long holdings of more than 600 million they had in December 1995-January 1996, thus implying that the recent spate of fund buying does not necessarily have to be over. To the extent that funds continue buying, the corn market will remain supported because the frenzy feeds on itself. At the very least, continued fund buying causes sellers to be wary and less aggressive.
LONG-TERM KEY FACTORS–Crop Size: The market figures the 1997/98 corn crop is somewhere between 9,300 million and 9,400 million bushels, which equates to a yield of 125.5-127 bushels per acre; the USDA currently holds yield at 125.8 bushels per acre and production at 9,312 million bushels. Using agronomic information and historical tendencies, we believe that the final yield will be closer to 128 bushels per acre, with production closing in on 9,475 million bushels. If production approaches this level, we would expect demand to increase but not bushel-for-bushel. Thus, carryout stocks would increase, inflating the stocks-to-use ratios as well.
Farmer Selling After New Tax Year: As we have mentioned before, if the lack of farmer selling is friendly for the short term, it should be negative longer term. If farmers hold off marketing their crops until January 1 and futures prices are still in the $2.90 area, then corn marketing should be heavy enough to cause hedge pressure that would weigh on futures prices.
U.S. Demand: Current export demand is less than stellar. But that has not been an issue yet this year as the market has focused on supply. Food/seed/industrial demand is not expected to deviate much from the USDA's figure of 1,749 million bushels. However, feed/residual demand could be a big demand focus. Feed demand comprises both feed demand and an estimation error for supply and all other demand components. It is only derived four times a year–on the quarterly Stocks-In-All-Positions reports. With the recent upward spike in corn prices, as well as the very large wheat and bean crops, corn feeding might not be as large as the USDA expects. (Indeed, our feed estimate figure of 5,605 million bushels is only 20 million less than the USDA's estimates, but we are using a production figure that is 160 million larger.) Thus, 1997/98 U.S. corn feedings might not meet the USDA's projected 5,625 million (and could be significantly smaller if production does not meet our expectations)–yet another reason for ending stocks to grow.
El Nino: El Nino is everywhere! On the TV, radio, magazines and newspapers. Even Congress is discussing the various links that El Ninos have to catastrophes and the potential for devastation this year. Were these people all born since the last El Nino in 1994/1995? Or is it that this El Nino is on course to become the strongest this century and they remember that the 1987/88 version killed more than 2,000 people worldwide and was followed by drought in the United States the following summer?
The El Nino-related risk to corn production between now and the spring is the 1998/99 South African maize crop, currently pegged at 8.5 million tonnes. El Nino has a fairly strong correlation to drought in South Africa, and during the 1994/95 episode, maize production fell more than 60% to 4.8 million tonnes. This time around, water reservoirs are at 90% of capacity and are expected to last two to three years. Nonetheless, the memory of the 1994/95 crop disaster is fresh in their minds.
PRICE OUTLOOK–Short Term: The market will be closely watching the high of $2.95, which if penetrated could lead to the next level of resistance at the double-top high of $2.98 made in March and April. Ultimately, we expect December corn to trend lower, breaking to the 50% retracement level of $2.75. We expect to see half of corn harvest done on this week's report and possibly 70% next week. Farmer selling will most likely increase, but the question remains as to whether it will be enough to wound this technically driven market. The major caveat to December corn breaking to this level is continued fund buying. We would consider buying March corn around the $2.85 area to carry us through the holiday season, anticipating a 15- to 20-cent rally.
Long Term: Don't be surprised to see a second “harvest” after the year-end holidays as farmers market their corn. Considering that this is potentially the second largest crop on record, farmer selling could be a significant factor in the late-January to mid-February time period, especially if prices are hovering around the upper $2.90-$3.00 area. El Nino will remain a swing factor hovering in the background.
Tom Levis
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