From the November 01, 2010 issue of Futures Magazine • Subscribe!

Grains: Drought and demand

Corn: It’s all in the yield

As the Russian drought decimated the Russian wheat crop, demand for other grains quickly followed and corn quickly followed the wheat rally. Until the drought hit, many analysts expected record yields, particularly in corn.

"What you had in late June was the perception of perfection in the grain market and that is a dangerous thing. People were looking at record or near-record yields and the weather was perfect in the United States. Then people were blindsided by several factors including the Russian drought, Canadian flooding, Canadian frost and snow, and Chinese frost and snow. The most bearish of all factors, though, became the U.S. yield," Chesler says.

While the Russian drought was not the sole reason for the rally in corn, it was one that added urgency to it. Over the summer we saw corn go from $3.25 per bushel on June 29 to a high of $5.22 ¼ on Sept. 24, breaking through the $5 dollar barrier.

Chesler says the most bearish factor this year has been the U.S. yield. "Tall as corn" (below) shows the U.S. corn yield has continued to grow, almost yearly. At the beginning of this year, the U.S. Department of Agriculture (USDA) projected corn yields to top 165 bushels per acre. Since then, that projection has dwindled, dropping first to 162.5 and then to 155.8 as we went to press. Streible expected yield estimates to drop to 158, which he saw as bullish. The lower than expected estimate pushed the entire complex limit up for two days.

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While these factors have worked in favor of corn’s rally, the USDA’s grain stocks report that was released on Sept. 30 threw a wrench in the mix. While analysts were looking for corn to come in around 1.407 billion bushels, the actual number came in at 1.708 billion. This blew analysts estimates out and proved demand has been a little less than expected and production has been better than expected. While it initially sent corn prices tumbling, corn proved resilient.

The $5 dollar mark is proving to be significant for corn as it has straddled that level through much of the rally. "Psychologically, [the $5 mark] is huge. Technically, it doesn’t hold very much significance. Psychology will determine perception, though, and perception will become reality," Chesler says.

While corn prices are much more domestic in nature than wheat, international growers will help determine the direction, especially Argentina.

The biggest factor to watch, though, is the U.S. yield. Most analysts saw a yield of 160 as a "very significant pivot point" determining which side of $5 corn will settle. The dramatically lower yield estimate has corn pushing $6, which should offer serious technical resistance.

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