Was That the Seasonal High in Corn?

June 1st, 2018

By:

Category: Grains

(Inside Futures) – Corn has been under pressure after making new yearly highs only a few trade sessions ago. The selloff in corn has been pretty fast and furious as the NASS crop conditions report showed a very strong start to the growing season and as the White house ignited trade fears with our number one corn buyer, Mexico. As corn clings to key support will it manage a recovery? Or is this the start of a larger selloff?

The USDA NASS crop conditions were released Tuesday afternoon due to the Memorial day holiday and showed that the corn crop was Rated 79% Good to Excellent. This represents the second highest initial rating of a corn crop that we had seen. The trade was expecting 72% G-E and corn prices had already started to sag in anticipation of a well rated crop.

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While the market was reeling with the stellar crop rating the White House threw another curve ball in the form of tariffs on Mexican, Canadian and EU steel and aluminum. This caused Mexico and Canada to retaliate with tariffs of their own. While there were a number of agricultural products named in the list of both countries tariffs corn and soybeans were spared, for now. Pork legs however were listed and this send hog prices sharply lower.

The corn and soybean market should not be without concern however. While Canada imports mainly fruits, vegetables and food products from the US Mexico is the largest buyer of US corn and the number 2 buyer of US soybeans and soybean products. This obviously could pose a big problem if trade wars escalate. It is a similar situation as with China where stiff tariffs on US corn and/or would cost Mexico dearly but it may be their biggest negotiating tool.

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In my opinion the commodity funds had gotten very long and needed to scale back a bit. Crop conditions and trade concerns may have been the spark for that. End of the month profit taking may have also played a role. Going forward initial crop ratings have a fairly poor correlation with final yield and do not necessarily mean that this will be a stellar crop. In 2012 for example the initial crop ratings were 77% G-E and we all know what happened with that (huge decline in crop conditions to say the least).

Trade concerns may be the more real threat. If things were to escalate with Mexico in particular things could get ugly in a hurry no matter what the crop looks like. I would hope however that the US would treat a longtime ally and trade partner with a great degree of caution and respect. The two week weather forecast is also mostly favorable and may not provide concerns about crop conditions. Some of the long term forecasts are a bit more concerning however and we will see the extent of the interest the funds have in the longer term bet that the corn crop may suffer this year and that trade negotiations will not have a significant effect on US trade.

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