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.
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.