Economy, not fundamentals, driving corn prices in 2010

Jan 15, 2010
by DTN

Who’s driving the bus?

2010 could be another year when Wall Street and Main Street have more influence on the price of corn than the size or condition of the crop.

Fundamentals may come into play later in the year, but for now, the outside markets seem to determine the direction of ag commodities, according to DTN Senior Analyst Darin Newsom.

The correlation between the Dow Jones Industrial Average and the monthly close of the Reuters/Jefferies CRB Index (which tracks a basket of commodities) is a very strong 93 percent, and between the dollar and the CRB is a negative 99 percent, Newsom said. “This shows that fundamentals are not the driving issue for commodities, rather it’s the flow of money.”

Where the dollar, the Dow—indeed, the whole economy—are headed this year are, of course, the headline questions. One can find a forecast to fit every temperament. Bullish forecasts call for a robust recovery this year, with the U.S. gross domestic product up 6 percent, while more modest

Downright bears worry that a W-shaped recovery may be in the works. IHS Global Insight in mid-December projected growth in the 2 percent range, but warned that the risk of a “hard W” is still uncomfortably high, about one in five, with the list of possible triggers including a premature tightening of fiscal and monetary policy, a collapse in consumer spending, a spike in oil prices, or the failure of a few more large financial institutions. “It would probably take a combination of these factors to drag the global economy back into negative territory,” said Nariman Behravesh, IHS chief economist, but it could happen.

With the dollar in such a tight negative correlation to the CRB, forecasts for the direction of the dollar assume a very large role in thinking about the 2010 market outlook and, once again, there’s a divergence in expectations. Rabobank economists said in mid-December they expect the weak dollar to continue, but DTN’s Newsom said he expects the dollar to strengthen this year.

The dollar index, which ranged between 88.50 and 44.20 in 2009, “may want to return to the 79 to 82 range, and 86 is possible,” Newsom said, basing his expectations on ideas that unemployment is not as bad as expected and the producer price index is creeping up. “The dollar is building in an expectation of inflation and higher interest rates,” Newsom said.

A stronger dollar would not be welcome news for ag markets in two ways. Fundamentally, a stronger dollar makes U.S. exports relatively more expensive for foreign buyers, and in terms of the markets themselves, a stronger dollar could divert noncommercial money away from ag commodities into other, higher-risk investments.

Unharvested corn is a factor

This year’s outlook must include more than the usual agenda of leftover business from 2009. There were still combines rolling—or at least unharvested fields where farmers may have wished they were working—at the end of December. How much corn was left to harvest, how much will be salvaged in the spring, and what the condition of that corn will be are all questions to be answered before farmers ever worry about what will be planted this spring.

Even the crop that is in the bin has more questions about quality than usual— what will test weights be, how much mold or other damage may ultimately be detected? Some of those questions may be answered by USDA in its Jan. 12 annual crop production report, but some may not finally be answered until corn starts to come out of storage in the spring and summer.

Will there be a full-blown battle for acres this spring? It doesn’t seem to be in the cards at this point. Private analyst Informa Economics told clients in mid-December it projects major crop acreage at 315 million acres, up from 2.3 million from last year, due to cuts in CRP acreage and the expectation that planting won’t be delayed the way it’s been the last two years. Informa expects corn acreage to be up 3.7 percent, soybean acreage down 0.7 percent, wheat acreage down 6 percent and cotton acreage up 10.1 percent.

With the rest of the winter and many market events yet to unfold, these numbers provide no more than a starting point for the annual discussion of planting intentions. The customary indicator, the bean-to-corn price ratio, is currently about 2.3 to 2.4 to 1, implying a bias towards more corn acres, but a price battle could heat up again in February and March.

As far as a price outlook is concerned, any numbers that anyone mentions have to be accompanied by the usual caveat about volatility. With the uncertainty about how active noncommercials are going to be in ag markets this year, analysts emphasize that point.

While the short-term trend for both soybeans and corn is up in early January, Newsom said he expects prices to work lower for both commodities later in 2010. He projects an annual low for nearby Chicago corn below $3.30. “If demand remains slow, corn could go to the lower third of its price range over the last three years, and basis could suffer convergence problems if futures don’t work lower.”

Soybean price expectations

Newsom said he sees soybeans going into the low $8 range, and wouldn’t rule out lows below $7 later in the marketing year. “The constant in soybeans is strong Chinese demand, while the variables are stocks and South American soybean production and a higher dollar,” Newsom said.

Old-crop prices as of Jan. 1 have corn in the upper third of the price range, and beans in the upper half remain in the upper half, so it might be time to make some corn sales, but perhaps show a little more patience with soybeans, Newsom said.

“As for new crop, get something on the books and get the money in hand,” Newsom said. “There will be market turmoil, and it could be an early opportunity to get prices locked in.” — Pat Hill, DTN