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THE HIGHTOWER REPORT
141 W. Jackson Blvd., Ste. 1520A, Chicago, Illinois
(October 30, 1997) CORN: While the short-term outlook for the corn market is one of seasonal harvest declines, the October 10 Crop Production report will be a critical factor for the 1997/1998 price outlook. Beginning stocks were reported last week at only 884 million bushels, down 49 million from the average trade estimate and the report implies higher than expected domestic feed usage and even tighter ending stocks for the coming crop year. If feed usage numbers are revised in the October Supply/Demand report to reflect the increased domestic consumption rate, and production remains the same as last month's report, ending stocks would come in near 732 million bushels, the second lowest in 23 years. This, combined with a general consensus that China's corn production will be revised lower by 5 million tons will create an extremely tight domestic and world stocks situation for the coming marketing year.
If the recent USDA attache report from China is correct, and corn production is down 5 million tons from current estimate and ending stocks 7 million tons lower, world stocks/usage would come in near the levels of 1995/1996 when corn went over $5.00. However, China is still exporting on the world market and U.S. production is expected to be higher. Both of these factors will be well defined by mid-October as U.S. production will be better known and China exports will slow and traders will begin to discuss if and when China will ban exports or even turn feedgrain importer during 1998. China exported 711,000 tons in August bringing year-to-date totals to 3.33 million tons.
The big problem with this scenario is the production number which most commercial traders believe is closer to 9.5-9.6 billion bushels compared to the September USDA forecast of 9.268. The “extra” 300 million bushels in production is now “needed” by the market to keep a lid on prices or else we will enter the El Nino winter with a difficult task of rationing supplies. Odds favor an increase in production but the extent of this increase will be the critical factor for the corn market. The difference in the two scenarios for May corn prices is 1.) If the USDA revises crop production to 9.5 billion bushels, ending stocks would come in near 950 million bushels and May corn prices would project to range from a harvest low of 2.55-2.60 to a spring high at 3.10-3.25 or 2.) If the USDA leaves the production level unchanged at 9.268 billion bushels, ending stocks would come in near 732 million bushels and May corn prices would project to a range from the harvest low of 2.60½ to a spring high near 3.95-4.10.
December corn has a tendency to drift lower into harvest during the month of October, especially in years of big production. The picture speaks for itself as China moves from the worlds second largest exporter of coarse grains to a major importer in the years ahead. The short-term scenario for the corn market would indicate continued weakness in the market into the Crop Production report and for a larger production number and a harvest low on the day of the report. From October 10, the market should be beginning a gradual “demand pull” bull trend or a dramatic price rationing bull market.
SUGGESTED TRADING STRATEGIES–1.) Buy May corn at 2.60½ with an objective of 3.09. Risk the trade to 2.54. 2.) Buy May corn 2.80 calls at 9½ cents with an objective of 44 cents. Risk 5 cents on the trade.
For daily market updates of the Hightower Report of Comprehensive Commodity Research, call 900-225-2200, extension 3 for Grain market Forecast. The cost per minute is $1.33.
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