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Market Commentary for 2/26/24

Jon Scheve with weekly market commentary made on February 23, 2024

If you are unsold or unprotected, the markets have been hard to watch. This has led many market participants to talk about how funds are short a record level of contracts. These groups seem to believe the funds will begin covering their shorts soon and the market could then rally 20-50 cents. 


How Likely Is This?

For a big rally to happen there will need to be a spark to ignite it. This would mean either a demand increase or a supply problem somewhere in the world.


How Likely Is a Demand Increase?

Demand increases are usually slow to develop and often take longer than a year to gain traction. For example, the soy crushing plants expanding to make renewable energy throughout the US may work, because it would require more bean acres, which could eventually help corn prices. However, many of these additional plants are not scheduled to be up and running for 18 months to 2 years.


How Likely Is a Supply Problem?

Droughts and planting delays in the US or other major corn producing countries could impact supply. Argentina’s corn crop is in the reproductive stage and appears to be in good shape for now. Brazil is currently planting their 2nd corn crop, so weather could impact production there in about two months. Here in the US, a wet spring in late April or a summer drought in July could also impact supply.


Could The Funds Short the Market More and Send Prices Even Lower?

Before 2013, funds never really put much of a short position on (see the yellow line in the chart below).

However, in 2013 crop conditions were improving and carryout was increasing, which led to the funds to put on their first sizeable short position of -100,000 contracts. Many thought this would be the limit of their short position, but after a slight correction they pushed it to -200,000 contracts, but never went below that for another five years. Then in 2019 funds pushed their short position to -300,000 contacts.


Each time funds hit a new record short position, some market participants say the short can’t get bigger, but then it does. It is possible funds may look at the global corn supply and go to -400,000 contracts. After all, they have been long nearly +400,000 contacts several times in the last 15 years. 


Possible Reason Why – Many US Farmers Are Undersold on Their 2023 Crop

Many farmers set basis against March futures, expecting a rally during the winter. However, now due to cashflow issues, they might be backed into a corner and could price some grain in the next week or so.


The following chart shows the commercial position, which is widely considered to be famers’ collective position. 

As the farmer sells the grain the commercial sells futures against that trade. Thus, it would be a bit strange for the commercial to be long, and since the ethanol mandate 17 years ago, commercials have usually never been overly long. But this week we found that they are.


The managed money funds are likely looking at this same chart and know farmers must eventually sell their grain before the next crop year. So, they may be sitting back and waiting for it to eventually happen, because they believe that time is on their side.


How Low Can Corn Go?

Historically, whenever the carryout and stocks to use ratio has been this big the value of corn at some point after harvest has seen the May or July contracts trade below $3.60. 


The market is looking for a way to shrink supply and discourage plantings in Brazil’s second crop or change a few acres away from corn in the US this spring. 


Some in the trade are predicting $3.00 futures are imminent, but that seems like a stretch with what we know today. Even in 2020 when the world shut down, corn never traded below $3.00. It’s important to remember that things always look the darkest right before the dawn, and low prices can also spur demand. 


It only takes one surprise to change the market’s perception and direction. The cure to low prices, is low prices.

Jon Scheve

Superior Feed Ingredients, LLC

9358 Oak Ave

Waconia, MN 55387


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