Technically Speaking
Darin Newsom DTN Senior Analyst

Monday 07/21/14

No Friends Yet for Cash Corn

As always, the true measure of the strength of weakness of any market is its intrinsic value. And in the case of grains, that means the cash markets need to be watched closely as they can sometimes disagree with what is going on in the futures market. However, both seem to be in agreement at this point: Corn is struggling to find buyers.

Source: DTN

One of the studies I like to use in my analysis really isn't technical at all, but my version of simple economics. Based on the idea that demand picks up when prices are low and slows down when prices are high, I've always used a general distribution chart based on weekly closes for the various markets. This chart tells met the percentage of time the market posts a weekly close above its current price.

Let's take another look at the DTN National Corn Index (NCI.X). The NCI.X is the national average cash price created by DTN collecting cash bid data from almost 3,000 locations across the U.S. When last Friday's information was gathered and calculated, the NCI.X came in at approximately (rounded) $3.52. This is the lowest weekly close for the NCI.X since the week of July 12, 2010.

But we all know the corn market, both cash and futures, has been trending down. I'm curious about how Friday's NCI.X relates over time. To that end, I have a number of distribution tables covering 5 years, 10 years, from the beginning of the demand market at the start of the 2005-2006 marketing year, and dating back to the opening of the 2003-2004 marketing year (when domestic demand first climbed above the 10 million bushel mark).

For this blog, as well as the one posted on July 7, I'll focus on the demand market study. On the chart, last Friday's NCI.X of $3.52 (blue column) shows that roughly 66% of the time weekly closes are higher than the current price. The 50% mark is at $4.10. However, the column that may have everyone's attention is the red one off to the left. This roughly reflects government loan price near $2.00, a level that the market has closed below 8% of the time since September 2005. It is interesting to note that the NCI.X has not posted a weekly close below the $2.00 mark since late March 2006, just as the Renewable Fuels Standards put in place by the Energy Policy Act of 2005 were starting to kick in.

The question is now, given the downtrend in the futures market that is showing no signs of slow (next major support on the long-term monthly chart is between $3.45 and $3.25), how close to loan might cash prices actually get?

If we look at the cash bid map on DTN, and trace our finger out to the western part of the Northern Plains, we see cash prices already in the low $2.00 range. If the sell-off seen early Monday holds through the close, and basis (difference between cash and futures) doesn't change, at least one cash bid could dip below the $2.00 mark with others close on its heels. If we look at DTN's Regional Index for North Dakota and Minnesota it shows an average cash price of $2.79.

Is there hope for cash corn? Again, based on the idea that low prices create increased demand one would think so. However, with projections calling for record U.S. production and reduced domestic demand (a dubious projection, in my opinion), buyers may be content to sit tight to see how far into this distribution range the NCI.X could fall before they step in.

Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.

Posted at 10:04AM CDT 07/21/14 by Darin Newsom
Comments (9)
Darin this record production is so blown out of the water by this corrupt USDA "estimates".This government controlled "market" is not good for farming, this is supposed to be a free country, we now more than ever need freedom from government control. God blesses us with a good crop and we have to live with "market" collapses from "estimates." Again the only hope producers have for a fair price is a disaster some where. How sick is that.
Posted by DAVID/KEVIN GRUENHAGEN at 1:33PM CDT 07/21/14
David, Kevin: Thank you for your comments. My thoughts on all things USDA are well known. I've long been a proponent of letting the market, any market, sort out its own supply and demand issues. That's one of the reasons I focus so much attention on the cash value, the intrinsic value, of a market. To me it is a better indicator of strength/weakness. In the case of corn, the fact the NCI.X has fallen to the lower 34% of its price distribution range reflects the actual old-crop supply and demand situation that exists today. What will happen when harvest rolls around is hard to say, but I still believe the cash market will be a better indicator of how large production may actually be. Thanks again for your comments.
Posted by DARIN NEWSOM at 2:20PM CDT 07/21/14
My problem isn't with the USDA's questionable stocks and production numbers, my problem is why our Government chooses to hamper American Agriculture by broadcasting these numbers to the world. To be fair and equitable, shouldn't the Govt. broadcast new car inventories, semi-conductor inventories, rolled steel, dishwasher, refrigerator, and other manufactured goods inventories (to name a few examples). Then everyone could decide when to purchase based on over-supply or shortage.
Posted by Lewis Flohr at 9:07AM CDT 07/22/14
Good morning Lewis. I share your thoughts in that this is not, nor was it ever, something the government should be projecting. Initially, USDA reports were intended to level the playing field between producers and large commercial traders who had access to supply and demand information. However, that system fell apart as spec trade in commodities grew and prices saw increasingly volatile swings on flawed data. Today, all kinds of fundamental information is available to traders/producers/etc. As I stated in Market Matters blog, USDA should be limited to one report, looking back at the previous marketing year rather than forecasting ahead monthly. Thanks for your comments.
Posted by DARIN NEWSOM at 9:28AM CDT 07/22/14
Are all the producers wanting government out of the forecasting business because it influences prices also in favor of getting rid of RFS which skews demand and prices? After all, government doesn't require you to purchase a new car, semi-conductors, rolled steel, dishwasher, refrigerator and other manufactured goods (to name a few examples).
Posted by David Kessler at 11:28AM CDT 07/22/14
Interesting point David. But to me it doesn't change the argument that the system would be better served by ending monthly USDA supply and demand and crop production reports, replacing with one final backward looking accounting. Did the Energy Policy Act of 2005, including the RFS, change the market? Absolutely. But it changed all aspects of the market: Supply, demand, investment interest, basis, price distribution, etc. Thank you for your comments.
Posted by DARIN NEWSOM at 11:45AM CDT 07/22/14
It is already 1.94 cash bid from Southwest Grain in Lemmon SD
Posted by JAMIE KOUBA at 11:52PM CDT 07/22/14
Good morning Jamie. I've been watching the developments in the cash corn market in the Dakotas on DTN's Cash Bid map. There are a number of locations that are getting close to that $2.00 mark in that part of the country. Thanks for your comments.
Posted by DARIN NEWSOM at 5:06AM CDT 07/23/14
I didnt Know corn had any friends ever. most used under priced always costly to grow
Posted by andrew mohlman at 8:18AM CDT 07/25/14
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