What is the likelihood of prices moving higher or lower from current levels (near $3.50 December futures)?
The glass-half-full or glass-half-empty theory is an economic philosophy that echoes an argument for price directional sentiment.
The variables that analysts measure are (in theory) the same and, therefore, open to interpretation for which direction prices are most likely to move.
The glass-half-empty crowd is negative on prices, while the glass-half-full crowd is friendly to prices.
The glass-half-empty argument is that big inventories left over from last year, good yield results this year, and harvest will keep pressure on prices.
The glass-half-full crowd, however, may look at a different set of variables and offer more of a long-term perspective.
In this perspective, we will look at the glass-half-full theory. When examining variables that move prices downward, it’s difficult to come up with much of a negative argument than is not already factored into the current market price.
From a price support rationale, probably the most supportive variable is that corn is currently priced at a level where most producers are losing money. Typically, producers are not anxious to give away their crop this time of year. Once harvest is complete, unpriced inventory is usually buttoned up tightly in storage and not likely to move until prices recover.
In addition, a supportive argument for higher corn prices is that the USDA has significantly reduced expected exports, down 443 million from last year’s 2.293 billion.
Is this too much of a reduction? One has to wonder why we would see such a reduction when the U.S. dollar is trading near a two-year low.
Just as important, world demand is likely to exceed world production this year. The USDA is also forecasting a large Southern Hemisphere crop. Any hiccup with Argentina or Brazil production, and U.S. export activity could quickly rebound.
Since the 2012 drought-shortened crop, five years of large production and low prices have created a large demand base, both domestically and worldwide.
Bottom line, even though carryout is adequate, there’s not room for error for corn production in the U.S. or elsewhere. Once the demand ship sails, the only thing likely to make it change course is higher prices.
From a chart/technical view, corn futures have recently posted two very friendly price signals, called bullish key-reversals. One on August 31 and one on October 12, the day of the latest USDA Supply/Demand report.
Managed money is significantly net short futures by over 140,000 contracts. With a lack of farmer selling on price setbacks, it is likely they will be covering (buying back) these positions by late fall.
End-users are in a position to purchase long-term needs with prices currently at their lowest level for the year.
An additional argument for the glass-half-full supporters is that the odds don’t favor continued record (or near-record) production, both domestically and worldwide. Weather issues will sooner or later adversely affect crop production.
Additionally, with corn prices generally below the cost of production availability of capital to finance, high producing crops could be jeopardized. That is, unless prices rally.
If you have questions or comments contact Top Farmer at 1-800-TOPFARM, ext. 129.
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