Nogger's Blog

18/08/13 -- Wheat is a follower of corn, I'm convinced of that. They key to where wheat prices are headed is therefore where are corn prices going?

The answer to that seems to fairly and squarely depend on whether you think that US corn yields will be higher or lower than the USDA's Monday forecast of 154.4 bu/acre. Some trade estimates are a bit lower, most are higher, with some considerably so.

The crucial factor that we don't know the answer to is what's the Midwest weather going to do between now and harvest time?

We do know is that we have a late planted crop that has matured slowly, therefore harvesting of corn will likely be late, leaving a larger than normal percentage of the crop vulnerable to an early frost. A cooler than normal summer doesn't necessarily mean an early start to winter though.

This one really is a "do I put it all on red or black?" type scenario.

As far as the US supply and demand side of the coin is concerned, we do know that corn sales are ahead of normal for this time of year (at 33% versus 22%). Wheat sales are also ahead of normal, although the US is currently being priced out into North Africa and the Middle East by European and Black Sea origin material.

They do however have "new" buying interest from Brazil and China, and are at a geographical advantage to service this extra demand.

Wheat's problem is rebuilding and holding onto a hefty premium over corn, and that's why I think that the latter holds the key to the fate of the former.

Whether the latest USDA corn production estimate of 13.763 billion bushels is too low (or even too high) or not, it is almost a given that the 2013 US corn crop will be a record high. It is in fact more than 650 million bushels higher than the existing record crop of 2009.

For 2013/13 US corn ending stocks of 1.837 billion bushels meanwhile, even if below pre-report trade estimates, still represent a massive increase (over 1.1 billion bushels massive) on 2012/13. World 2013/14 corn ending stocks are forecast at a 13 year high too.

The roll of the dice seems to favour further price depreciation for corn, unless you are keen on the early frost theory. We also have the threat to demand for US corn to come from a large rebound in corn production in Europe and a record crop from Ukraine just around the corner. 

Further down the line we can expect South American growers to plant more soybeans and less corn later this year. This might ultimately help rebalance the soya:corn price difference if and when it happens.

Meanwhile though, expect choppy trade in corn to continue with each fresh daily weather forecast. The size of the record large fund short position obviously does leave the market vulnerable to a corrective bounce, but my money would be on corn (and therefore wheat) prices being lower than they are currently come October time.