Corn Shock Creates Buying Opportunity

07/08/2011 9:00 am EST

Focus: COMMODITIES

Andy Waldock

Founder, Commodity & Derivative Advisors

Recent data stunned the corn markets and spurred a big correction, but if past resistance becomes support—just like what has happened with oil—now is the time to buy in preparation for higher corn prices ahead.

The corn market was facing unprecedented demand heading into this year’s planting season. The tightest supplies since 1937 and the governmentally mandated ethanol program’s consumption of 40% of this year’s crop put extra pressure on Mother Nature to produce a record crop.

We all know that this spring broke the 100-year-old record for rainfall. When we combined this with cold temperatures, flooding along the Mississippi, and a southwestern drought, it became obvious that corn acreage would suffer, as farmers would be forced to wait for the fields to dry and planted more beans and less corn as a result.

Last week, the USDA issued its acreage report and the markets fell out of bed. Corn acreage planted was reported up 5% from last year at 92.3 million acres. This is the largest planted area since 1944 and second only to 2007.

The market sold off nearly 12% in the next two trading sessions as traders, farmers, and end-line users scratched their heads in wonder. Message boards were lit up as people wondered how there could possibly be an increase in acreage when the main question was, “How many acres have been lost due to flood damage and the wettest spring on record?”

The USDA’s accounting methods and history of revision has been brought to the forefront of this discussion. Is the USDA turning into the Federal Reserve System and constructing its data to fit its needs?

The report did create a flush in the market and eased food and ethanol prices instantaneously. The flush also washed out most trading and hedge funds on the long side of the market.

The reported acreage versus the expected acreage was one of the biggest surprises on record. One industry analyst, Rich Feltes, actually found these numbers to closely match his own forecasts, while Carl Zulauf of Ohio State University questioned the validity of the USDA’s estimates and pointed to next week’s USDA supply and demand report for more accurate data.

Finally, some of the largest Ohio farmers don’t see any way that the acreage reports can’t be revised sharply lower.

The real issue here is how we trade it. The analog I’d like to pass on is crude oil’s decline to $90 per barrel on the news of Saudi Arabia’s production increase, combined with waning demand in the face of a recessionary Europe.

Crude oil sold off hard on a news event, moving down to what was previously a resistance level for that market at $90 per barrel.

Corn sold off on a news event as well, moving down to a level that was once also considered resistance at $5.50-$6.00 per bushel.

The dynamic in crude oil has changed, so what was once resistance—$90 per barrel—is now support. I believe the same is true in the corn market, and I expect the market to bounce around here as traders square their positions, but ultimately, I believe the acreage numbers will decline and the acreage that has been planted will not provide the 155-bushel-per-acre yield expected due to delayed planting.

Ultimately, the tight stocks coming into this year, combined with the ethanol market and growing global demand will place added stress on this year’s crop, which I believe will be smaller than the most recent USDA predictions.

Therefore, this selloff in the corn market should be bought in anticipation of higher prices at harvest.

By Andy Waldock of Commodity & Derivative Advisors

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