The Corn Is As High As An Elephant’s Eye

Intermediate
  • Corn has been on a rip since August 9
  • The time based technicals are all flashing bright green
  • Market sales are strong and a new opening in Brazil is beckoning
  • Look for prices to test US Cents 500/Bushel

“…There’s a bright golden haze on the meadow,  There’s a bright golden haze on the meadow

     The corn is as high as an elephant’s eye, And it looks like it’s climbing clear up to the sky…”

(“Oklahoma” Rogers & Hammerstein)

Corn spot as shown in Figure 1, has been on the rise since August 9, 2020. The price is up by 36.29% , well above the 50- and 200-day moving averages and the technical outlook screams “STRONG BUY” from one minute to one month.

Figure1: Corn 12-Month Chart  and Time Technical Sentiment
Source: www.investing.com, Spotlight Ideas
Figure1: Corn 12-Month Chart  and Time Technical Sentiment
Source: www.investing.com, Spotlight Ideas

Good Customer Base Overrides Complacency

The path carved out by the spot price has been relatively even over the past 12 weeks averaging 3.6% and so one could argue that it is easy to become complacent that corn will keep delivering gains. If the main participants were becoming too comfortable it could well be that corn would be heading for a jolt.

Global demand appears strong as to the week ending October 15th, U.S. producers sold 1,831,600 million Tonnes (67.3 million bushels) of corn.

Japan was the most active buyer as it acquired 490,100 million, followed by China with 433,500, and then Mexico taking 377,400.

The well-regarded grains analyst Dan Hueber of The Hueber Report wrote in his market report last Wednesday that in the market:

“… bulls show no signs of surrendering the throne as of yet … there are no warning signs that a revolution could be in the making. …”

Of course, with such a strong showing one may feel this the wrong time to step into the corn market.

I am taking a view that there is more to come as producers are holding corn reserves for later sale even though there is good current cash to be realised in both basis and carry spreads.

One reason for this is that at the moment soybeans are paying better returns and as a result the supply not the corn market is being restricted as farmers are selling the soybeans and holding the corn.

Brazilian Bonus

Brazil’s government has recently announced a temporary suspension of  8% import tariffs on corn and soybeans from outside the Mercosur trade bloc to help reduce food prices that are pushing up domestic inflation.

Brazil’s annual inflation rate increased to 3.14% in September from 2.44% in the previous month and above market expectations of 3.03%. It was the highest inflation rate since March, as cost of food & beverages rose to almost a four-year high of 11.79% cf. 8.83% in August.

Of course, for a free flow of corn from the U.S. to Brazil there will need be a resolution to several issues between the U.S. Department of Agriculture (USDA) and CONAB in Brazil.

USDA observed that there are several varieties of genetically modified corn grown in the U.S. that are not approved in Brazil and they will require approval via a special application process.

This may not happen overnight, however, Brazil has an incentive to be quick as larger second Brazilian corn harvest will not be available until June 2021, there could be an increased need to fill yawning shortages.

This really would be a new lift to the market as Brazil does not import much corn cf. domestic production.  It has been over 20-years since it has imported corn from outside South America.

Figure 2: Corn Three-Year Chart
Source: www.investing.com, Spotlight Ideas
Figure 2: Corn Three-Year Chart
Source: www.investing.com, Spotlight Ideas

I am looking to invest in corn and will set a first target of US Cents 464/Bushel that would match the peak seen June 17, 2019.

However, I want more and set a higher objective of US Cents 500 to 505/Bushel driven by the retained supply and potential of strong sales into the rare market of Brazil. My stop is set a deep level of US Cents 362.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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