Macro: Sandcastle economics
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How high can grain prices grow?
Ole Hansen
Head of Commodity Strategy
Summary: Corn futures in Chicago continue to scream higher as the market adapts to a potential dramatic collapse in the prospect for US acreage and yields this season. Widespread flooding across the US corn-growing belt has jeopardised vast amounts of this year's crop.
Slides below are from today’s www.morningcall.saxo which is live daily at 6:45 GMT (CET +2, ET -4).
Adverse weather and flooding in the Midwest and Plains have not only delayed planting of corn and soybeans but also raised concerns that flooding may damage the quality of the wheat crop already in the ground.
Today the price of corn reached a fresh three-year high following the release of the weekly planting progress report, currently most-watched set of data from the USDA. The latest report covering the week to May 26 found that the record slow historic planting pace continued last week with just 58% planted compared with 90% for the same time last year. US farmers across the corn belt have not been able to enter their flooded fields and with the clock ticking down to the time when planting no longer makes sense has almost arrived. This partly explains the continued rally today with the total gain on the new crop December contract having reached 25% during the past two weeks.
As we have pointed out for several weeks in our weekly COT report updates, the risk of a violent reaction in grains has been rising throughout the past few months. Just four weeks ago the speculative community or hedge funds held a record short across the major crops of corn, wheat and soybeans.
With such a one-sided position the risk of a reversal grew and once both the technical and fundamental outlook change a sharp reaction followed. During the week to May 21 a record amount of corn was bought by hedge funds but with 116k lots still to cover before going long the market has continued to find strong support.
With such a one-sided position the risk of a reversal grew and once both the technical and fundamental outlook change a sharp reaction followed. During the week to May 21 a record amount of corn was bought by hedge funds but with 116k lots still to cover before going long the market has continued to find strong support.
The December corn contract has been here before, both in 2014 and 2015 the price reached $4.5/bu albeit during the growing, not the planting period. Both of these eventually ran out of steam and a major correction followed before the harvest season. The risk of a similar turnout this time can not be ruled out but the combination of a fundamental outlook looking worse now and the mentioned scramble to switch from short to long may carry corn higher still in the short term.
While these developments are mostly bad news for US farmers as they don’t have the crop to sell to take advantage of the price spike it is different in South America. In response to the current price spike the cabinet chief of Argentina’s agriculture secretariat told Reuters on Tuesday that Argentina’s corn harvest for the 2019/20 season could surpass the record production of 56 million tonnes for the current 2018/19 season.
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