5 Reasons To Sell Corn Futures

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Includes: CORN, WEAT, WEET
by: Oleh Kombaiev

Summary

World balance of supply and demand is still on the supply side.

Overestimate of US exports.

Market has technically returned to medium-term downtrend channel.

#1. World Supply/Demand

The USDA's August forecast has once again confirmed the shift of world corn balance towards the record supply. The ratio of world end-residues to export turnover and consumption in the current marketing year is predicted to be 17.6%, which is only 0.01% less than the record value of the last 9 years. I would like to note that all USDA's forecasts since April of the current year assume this ratio value to be above 17%.

Source: USDA.

Within the world corn market the U.S. export share is declining, reflecting improvement of competition. In 1995, the U.S. exported 80% of world corn; in 2015 its share will be about 39%. Now, Brazil and Ukraine are considered to be the largest exporters together with the U.S. For the preceding year, the Ukraine's national currency has devalued by 62%, the Brazilian real has depreciated by 53% and the US dollar has appreciated in the international market by 14%. Not the best deal for the U.S. exporters.

Source: USDA.

#2. Slow US Export

The U.S. export potential in 15/16 marketing year is estimated at 46.99 million tons. Thus, the current corn export sales of a new crop is 39% lower than in the previous year and are the lowest over the last 5 years. Obviously, importers don't hurry to buy corn of the U.S. new crop at the current prices. I believe that in the near future the USDA will inevitably lower the forecast of US exports in the current marketing year by increasing respectively the forecast for the ending stocks. US wheat would have to find buyers within the local market.

Source: FAS USDA.

#3. Good US Yield

The current share of the U.S. corn crops, which are in good and excellent condition, makes 69%. This is only 4% less than the best result for the last three years. During July-August of 2015, the condition of crops tended to improve. Based on the history of USDA's past forecasts, good condition of crops during this period indicates a high probability of increasing the final yield with respect to intermediate forecasts.

Source: USDA.

#4. Corn vs Wheat

Due to its nutritive properties wheat is better suited for food purposes than corn. Over the past three years, the difference in the cost of wheat and corn is reduced. This is a negative factor for corn with regard to food supply. We can see something similar in China as well. As a result of implementing the farmers' subsidizing that produce corn at a very high cost, on the one hand, and 65% of out-of-quote corn import duties, on the other hand, local feed mixes' producers have increased the import of barley, sorghum and DDG up to record levels. By the way, the Chinese government is changing the rules of these crops import, which will also involve additional competition for corn in the world market.

#5. Technically the market became negative again

The July series of 15 days of continuous increase in corn price has completely run out of steam in August. Quotations returned to well-identified downtrend channel, where the price of corn futures has changed from the beginning of the year. I predict a depreciation of the December corn futures up to $ 3.15 within the next three months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.