The first USDA forecast for 2016/17 did not bring significant clarification of the situation on the corn market. The ending stocks in 2015/16 and 2016/17 are estimated almost at the same level. At the same time, the production and the consumption of corn in 2016/17 are equally increased by 4.4%. The only thing that stands out from the overall picture is the forecast of corn export in the new season at the level of 132.9 million tons (+9.5% YOY).
Generally, when assessing the expected corn market situation in 2016/17 based on the stock to use ratio, a slight shift towards the demand should be noted.
But not everything is so unambiguous for corn in the new season.
Firstly, as in the case with the wheat market, the distorting effect of China on the global corn balance should be noted. According to USDA, in 2016/17, due to the reduced domestic production (-2.9% YOY) and the increased domestic consumption (+4.36% YOY), the ending stocks of corn in China will be reduced by 8 million tons (-7.3% YOY), amounting to 101.5 million tons. At the same time, it is expected that China will practically not export corn, while imports will amount to the symbolic 1 million tons. It means that in 2016/17 China will not actually affect the world corn market. At the same time, the ending stocks of corn in China accounts for almost half of global stocks, and therefore, China, albeit formally, affects the evaluation of the global corn balance structure.
If we consider the corn market structure based on the stock to use ratio excluding China, we will come to a conclusion that the global corn balance will be less tight in the new season, which actually means resistance to the rise in prices.
Secondly, in March the Chinese Government announced the end of the policy supporting the domestic corn prices and the domestic stocks accumulation. This is likely to reduce the gap between global and domestic corn prices and will definitely encourage the use of local corn instead of importing of its cheaper substitutes like sorghum and DDGS. Accordingly, this proposal will lead to the growth of sorghum and DDGS in the world market, which in its turn will also weaken the corn price.
But the "bulls" also have their trump cards.
Due to the extreme heat in Brazil, USDA lowered the corn production prospects in the country in 2015/16 from 84 million in April forecast to 81 million in May forecast. In the meantime, CONAB - a local agricultural agency, estimates the harvest of corn in 2015/16 at the level of 79.9 million. tons. There are projections that suggest more severe harvest reduction - up to 76 million tons. If the worst expectations are realised, the corn harvest in Brazil in 2015/16 will be the lowest over the past five years.
The increased corn export activity in the United States delivers positive signals. At the current moment, the accumulated exports volume coupled with the outstanding sales volume amount to 89% of the expected income, which almost corresponds to the indicators of the previous three years. Although, the export rate in April chronically lagged behind the average rate.
However, it is worth taking into account the increased likelihood of an early tightening of monetary policy in the United States which will pose a problem for American exporters in the form of an expensive dollar.
The funds also seem to incline to the side of the "bulls". According to the latest COT report, during the last 4 weeks the funds remained in although moderate, but net long position.
Source: Saxo Group
Prior to the completion of the sowing company and the first information about the condition of the corn crops in the United States, the market will probably be "nervous". In my opinion, the Brazil factor could potentially increase the corn futures price up to $ 4.08, and then even to $ 4.20. Next, we'll take a look at the weather, but the above mentioned factors of the Chinese influence will obviously create the resistance for the continuation of the corn prices increase.
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