"Bearish". That word has been tagged to almost every piece of corn analysis, be it fundamental or technical, dating back to early April. However, as we wait for yet another round of USDA numbers, which of course are expected to be bearish (naturally), I'm going to make the argument as to why the corn market could close higher Friday.
One number, just one, could change the outcome for corn: National average yield. As discussed in the report preview ("Extreme Reports") the pre-report average estimate came in at 166.8 bushels per acre, up from USDA's June projection of 165.3 bpa. However, if we consider a couple of factors, USDA may be more inclined to leave the yield number unchanged for now.
Frist, USDA has no reason to raise its national average yield estimate. The August report is its first release of official survey results, so the government could simply stand pat on its projection, being able to pin a possible bearish reaction in August to the survey component.
But what about the incredibly high NASS weekly crop condition ratings that are far higher than the record yield year of 2009? That's simple - USDA's yield projections are not influenced by NASS' weekly numbers. I know, it sounds silly to me too, but that's how the system works. So if USDA doesn't have an official survey of yield potential, and it can disregard early season record high crop condition ratings, it is highly likely that it decides there is no good outcome for itself by raising national average yield in July.
So, if yield stays at 165.3 bpa, and USDA does incorporate its new harvested acreage estimate of 83.8 million acres from the June 30 report, total production would fall from the June (and May) projection of 13.935 bb to "only" 13,852. And if every other supply and demand number remains the same, then new-crop ending stocks would dip to 1.643 bb, roughly 130 mb below the pre-report average estimate.
This being a blog that looks at the technical side of the market we now have to ask if the charts would agree with a bullish interpretation of Friday's reports. Those that have been following the weekly analysis (usually posted on Sunday mornings) will recall two phrases: Corn is in a downtrend; and, Weekly stochastics continue to show the market is oversold. While both remain true, it is the latter that could possibly lead to a change in the former.
Generally speaking, a downtrend in a commodity market is tied to increased noncommercial selling; be it long-liquidation or the addition of new short positions. Since early April, pressure in the corn has been tied in large part to the increase of short positions by noncommercial traders leading to a reduction in their net-long futures holdings.
Why is this distinction important? As stated above the corn market is sharply oversold, with the December contract's weekly stochastics (bottom chart) not only below the 20% but in single digits. In addition to that, the September contract is trading in the lower 17% of the 5-year price distribution range while the December contract is priced in the lower 19%. The DTN National Corn Index (national average cash price) was calculated at $3.69 Thursday evening, put the cash price in the lower 29% of its 5-year distribution range, but more importantly near the lower 40% of the range established since the beginning of corn's demand market at the start of the 2005-2006 marketing year.
It should be noted that the December to March futures spread (second chart, green line) has seen an ever so slight weakening of its carry this week to 10 3/4 cents. While still a neutral to bearish level of full commercial carry (total cost of holding corn in commercial storage), it does indicate that commercial buying has emerged with the cash and futures market priced this low.
Last but certainly not least, the market volatility (third chart, red line) of the December contract has climbed to near 20%, its highest level since September 2013.
Let's put the pieces together now: USDA could see no reason to increase yield, therefore lowering its production estimate; corn prices (both cash and futures) are at levels that have historically sparked increased buying interest, the December to March futures spread is showing light commercial buying interest, market volatility is as high as its been in almost a year, and noncommercial traders are holding their largest short futures position (last reported at 293,291 contracts) since this past February.
This combination could lead to a round of noncommercial short-covering (buying) after the release of the report, resulting in a higher close Friday and maybe, just maybe, the start of a short-lived uptrend until the August report, with its survey results, rolls around.