Technically Speaking
Darin Newsom DTN Senior Analyst

Wednesday 10/09/13

Consolidating Dec Mar Corn

To the casual observer, watching the corn market is similar to watching a sloth race. Neither the futures market nor the futures spreads show much movement, leading one to question whether or not they are even alive. But if you look closely, both are showing just enough signs of life to make them interesting analytical studies.

Source: DTN ProphetX

I'll return to the futures market another day. For now, with USDA reports on hiatus, let's look at what the December to March futures spread is telling us about the market's fundamentals.

Take a look at the daily chart for the nearby new-crop spread, otherwise known as the Dec to March. Note that since late August the carry in the spread has held between 12 cents (upper blue line) and 13 cents (lower blue line). Just before this consolidation began the spread had reached a low of 13.50 cents carry. To refresh your memory, a futures spread showing a carry (or contango, same thing) means that the deferred contract is higher priced than the nearby contract. The larger the premium the deferred contract holds, the more bearish the market's supply and demand situation is. Also, my charts trend down as the carry gets larger as it shows the price of the nearby contract less the price of the next deferred contract. Conversely, it would trend up if the carry was weakening or the inverse (nearby contract higher priced than the deferred contract) was strengthening (see Tuesday's blog regarding the Nov/Jan bean spread).

Turning back to corn, it recently looked like the spread was going to push through its support at 13 cents to test the previous low of 13.50 cents. However, enough commercial buying came back to the market to take it off the support level, rallying it a modest 0.50 cent to a carry of 12.50 cents. Keep in mind this happened before news of a new sale to China hit the wire.

In the grand scheme of things, a 0.50 cent rally is not a big deal. As this chart suggests, the Dec to March spread is a long way from establishing an uptrend with a bullish breakout above the 12.00 cent carry mark. Given that harvest is ramping up, and some new-crop sales will be made right off the combine, it would be surprising for the spread to do much over the coming weeks. However, if we do see a move, either bullish or bearish, it will give us the information we need as to the market's changing opinion on the 2013 harvest.

Stay tuned.

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Posted at 11:20AM CDT 10/09/13 by Darin Newsom
Comments (2)
In regards to your column regarding corn demand, I saw a scatter price study of the price of corn in relation to the carryout to use ratio that showed every year back to 1991. It should be noted that every year since 2006, prices were above the regression line of the study, which the author theorized was due to ethanol influence. Using this line of thinking, this negates the thought that corn would revert back to the prices shown by the years and high carry outs that you mentioned in your article. HOWEVER, the figures are still sobering. Using a 17.5 carry out to use ratio, incorporating in the same "ethanol influence" as shown in 2006-2012, points to a fall low of the area of 3.40. One thing that I was interested in that I haven't seen is what wheat stocks were in relation to corn stocks in the years mentioned, and if they could keep the corn price from going to this level.
Posted by Brandon Butler at 2:59PM CDT 10/11/13
Interesting analysis Brandon, and I don't disagree. Given that the corn market remains under the influence of ethanol (that sounds strange, I know) the likelihood of falling back to loan rate is small. Fundamental data suggests it is only a possibility, based on previuos marketing years with similar ending stocks to use percentages. From a technical point of view, using the long-term monthly chart, I have support at roughly $3.70. This is the midpoint of the range from the December 2008 low of $2.90 through the June 2009 high of $4.50. Monthly stochastics are also approaching the oversold level of 20%, 11.2% (faster line) and 24.6% (slower line) at Friday's close. One last thing, DTN's Six Factor price distribution tables show the $3.70 mark to be in the lower 18% of five-year range with $3.40 dropping to the lower 6%. More importantly, if the DTN National Corn Index (national average cash price) were to keep pace with the futures market, it would put cash corn in the lower 25% of the five-year range. Again, great comments and thanks for the discussion.
Posted by DARIN NEWSOM at 9:11AM CDT 10/12/13
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